A House Panel Takes Conflicting Testimony on a Durbin ‘Moratorium’

Congress heard conflicting testimony Thursday on whether implementation of new debit card restrictions should be delayed. The rules, which were proposed by the Federal Reserve in December as directed by the Durbin Amendment to the Dodd-Frank Act, came under attack in House of Representatives subcommittee testimony from financial-institution and network officials as likely to make debit cards unprofitable.

Merchants and merchant representatives, meanwhile, hailed the Fed rules and urged that they be made effective as soon as possible. “The Fed’s getting it right, it needs to go forward, and if anything [its mandated interchange cap] needs to be lower,” declared Doug Kantor, a partner at Steptoe & Johnson who appeared on behalf of the Merchants Payments Coalition in a hearing before the Financial Institutions and Consumer Credit Subcommittee of the Committee on Financial Services.

The hearing, which also included sometimes testy cross examination of a Fed governor, came as Congress starts to reconsider the Durbin Amendment, which critics say was rushed through the House and the Senate last year before President Obama signed Dodd-Frank into law in July.  “The Durbin Amendment passed with no consideration in any committee,” Josh Floum, general counsel for Visa Inc., complained to the panel.

Floum and banking representatives urged what some called a “moratorium” on the Fed’s rules, which are set to go into effect July 21. “This law is bad public policy [and] we need to delay it,” said Frank Michael, president and chief executive of Allied Credit Union, who appeared on behalf of the Credit Union National Association. Michael argued against the rules even though his institution and others under $10 billion in assets are exempt.

The Durbin Amendment charged the Fed with setting rules to implement caps on debit card interchange and new rules for network routing. The Fed’s proposal includes provisions for caps of either 12 cents or 7 cents per transaction as well as requirements for unaffiliated networks for merchants to choose from. The Fed is taking comments on its rules until Feb. 22 and must craft a final version by April 21.

In its questioning of Fed governor Sarah Bloom Raskin, many members of the panel appeared to agree that the banking regulator had not been given enough time by the law, and so had come up with what one member called “flawed” rules. “A delay in the implementation of this rule is definitely in order,” said David Scott, D-Ga. But while several members pressed Raskin to say whether the Fed should have more time, she would only say that the matter is up to Congress. “I think you see how controversial [Durbin] is,” she said. “It is your prerogative regarding how much longer you want us to look at this.”

Raskin did concede, in answer to concerns from subcommittee members, that the Fed would take reduced debit card interchange income into account when conducting bank examinations. Its proposed caps cut interchange from what its surveys indicate is a current 44-cent average, resulting in an estimated $12 billion to $14 billion loss in revenue for financial institutions. “As a regulator, does it concern you that the industry is going to lose $12 billion?” asked a visibly irritated Blaine Luetkemeyer, R-Mo. Responded Raskin: “Our examiners will look at this depending on the profile of the bank.”

Luetkemeyer also charged that the Fed is improperly setting prices for a private industry, while Donald Manzullo, R-Ill., said the Fed’s proposal is flawed because the regulator didn’t survey small financial institutions. Raskin denied the price-setting charge, arguing the Fed is instead “setting standards.” To Manzullo, she admitted the proposal’s routing provisions will likely affect small institutions, even though they are exempt from its price caps.

A panel of merchants, merchant representatives, financial institutions, and Visa’s Floum debated Durbin’s merits, with the merchants calling for the Fed rules to take effect as scheduled and the financial-industry representatives pushing for delay. “We urge Congress to stop, study, and start over,” said Allied Credit Union’s Michael, who fears that networks will end up levying one set of interchange for all issuers, regardless of size. Visa announced in January it plans to deploy a dual interchange schedule under Durbin, but Michael was skeptical, arguing there is no “guarantee” other networks will follow suit. He also said the Fed proposal’s routing scenarios, which require at least two unaffiliated networks on each card, “will drive costs down to the lowest common denominator,” robbing small institutions of the benefit of their exemption.

The hearing, which comes in the wake of the Republican takeover of the House, adjourned while leaving it unclear what action, if any, Congress might take on Durbin. But remarks from several of the panel’s members, including Democrats, indicated a belief the Fed should have been given more time to devise its rules.