Industry efforts to block the cap on debit card interchange fees are intensifying as the deadline for implementing that new rule nears.
An unusual coalition of trade groups representing large and small banks and credit unions has filed an amicus brief supporting a law suit filed by Minnesota-based TCF National Bank, challenging the constitutionality of the fee limit, mandated by the “Durbin Amendment” to the Dodd-Frank financial reform legislation. The amendment directed the Fed to establish a cap on the “swipe” fees debit card issuers charge merchants, reflecting the “reasonable and proportional” costs of the debit card programs. The Fed’s proposed rules would cut those fees to a maximum of 12 cents from an industry average 44 cents per swipe, reducing the banks and credit unions collect by about $12 billion annually, according to some industry estimates.
TCF’s suit contends that the fee cap “irrationally, prejudicially and illegally” interferes with the bank’s operations. The amicus brief signed by the American Bankers Association, the Financial Roundtable, the National Association of Federal Credit Unions, the Credit Union National Association, among others, warns that the restriction on debit fees, if implemented, “threatens severe adverse consequences for consumers, the financial industry, and the economy.”
Although the amendment, sponsored by Sen. Richard Durbin (D-IL), won overwhelming support in the Senate, a bi-partisan group of Senators , led by a Democrat (Sen. Jon Tester from Montana) has introduced legislation calling for a two-year delay in implementing the fee cap, pending a study of its impact.
“I think there is a little bit of buyers’ remorse as I talk to Senators in the hallway,” Tester told the New York Times, suggesting that his legislation may garner more support than industry observers are predicting.
“The stakes are simply too high to move forward with this rule without a closer look at the impact on consumers, credit unions, community banks, and the small businesses and jobs they sustain,” Tester said in a press statement. “That’s why we need to make sure we stop and study these proposed rules before implementing anything.”
Consumer groups and retailers, who supported the cap, are fighting back, arguing that the unrestricted swipe fees enrich banks at the expense of consumers and cut into retailers’ profits, impeding their ability to create jobs. Retailers say they will pass on some of the savings from lower swipe fees to consumers, but bankers insist there is no guarantee they will do so, and good reason to suspect they won’t. Card issuers have also warned that the fee cap will force them to increase fees on other products and services to compensate for the revenue loss. Some issuers have suggested that they might end debit card reward programs, begin imposing a usage fee on consumers, limit transaction sizes, and reduce the availability of the cards to lower-income consumers.
The Fed is supposed to issue implementing rules in April and begin enforcing them in July. The proposed rules, published last year, exempted small banks and credit unions with assets of less than $10 billion. But industry executives say the exemption is meaningless, because small banks will face competitive pressure to lower their fees, even if they aren’t required to do so. Fed Chairman Ben Bernanke and FDIC Chairman Sheila Bair have also questioned the practicality of the exemption, noting that retailers won’t be required to accept the bifurcated fee structure the exemption would create.
"The costs and benefits were not perhaps as thoroughly explored as they should have been," Bair told the Wall Street Journal in a recent interview. She also echoed industry skepticism about the extent to which retailers’ savings will trickle down to consumers.
"I'm not sure that's going to happen,” she said, “and if it does happen, the benefit to most retail customers would be…tiny,"
Bank and credit union lobbyists have noted the concerns expressed by Bair and Bernanke, as well as those Comptroller of the Currency John Walsh raised in a comment letter, in which he noted, “The impact of a revenue reduction of this magnitude has not been studied, but it is clear that it will change how financial institutions, both large and small, will do business, with obvious negative impacts on their ability to recover their costs of operation and unpredictable collateral consequences for their customers,” he wrote.
Many industry analysts, who had given industry efforts to roll back the debit cap little chance of succeeding are beginning to re-evaluate that assessment, given the intensity of the lobbying campaign and the support it has been receiving from regulators and lawmakers.
Rep. Barney Frank (D-MA), ranking member on the House Financial Services Committee, who sponsored the Dodd-Frank legislation in the House, agrees that “the Fed was given too narrow a set of [guidelines]” on which to base its debit card rules. A move to redraft the Durbin amendment might find strong support in the House, which, Frank noted, did not vote separately on that provision. “Now, there is genuine political pressure to do something [about it],” he told the New York Times, adding, “it is very much in play.”
FIGHTING FOR YSPS
It wasn’t so long ago that the Fed was being criticized for doing too little to regulate the financial institutions it oversees; now it is being hammered for doing too much. Banks and credit unions appear to be making some headway in their effort to block or limit the cap on debit card swipe fees the Fed is preparing to implement. And now mortgage brokers, too, seem to be gaining some ground, or at least, getting some attention in their battle against the loan officer compensation (LOC) rule, scheduled to take effect April 1.
Part of the Dodd-Frank financial reform bill, the LOC rule targets ‘yield spread premiums’ that were used widely during the housing boom to compensate brokers for originating mortgages at rates above the lender’s benchmark. The Fed’s new rule would prohibit compensation based on the terms of the mortgage, removing what critics claimed was an incentive for brokers to “steer” borrowers toward higher-rate loan programs, even when borrows could qualify for a lower rate.
The National Association of Mortgage Brokers and the National Association of Independent Housing Professionals have filed separate suits seeking temporary and permanent injunctions to block implementation of the rule, which they claim would decimate the mortgage brokerage industry and harm consumers. The trade groups say the Fed should withdraw this portion provision of the compensation rules and allow the new Consumer Financial Protection Bureau (CFPB) which has rule-making authority in his area, to address the issue.
Fed officials announced several weeks ago that they would defer to the CFPB on revisions to the Truth-in-Lending-Act mortgage disclosure regulations, which the agency had been drafting, but they decided to proceed with implementation of the LOC rules, because work on them had been finalized.
But some lawmakers are urging the Fed to delay the compensation rule, because of concern that it would add more stress to the housing market. “The proposed rule will have the unintended consequence of creating more uncertainty for small lenders and further impede home originations,” Senators David Vitter (R-LA) and Jon Tester (D-MT ) said in a letter to Fed Chairman Ben Bernanke.
The Fed’s failure to provide necessary guidance has left small banks and mortgage brokers “in limbo, unable to effectively design compliant compensation systems for the future,” the legislators said.
The Fed’s rationale for abandoning other TILA rule-making – to avoid multiple and possibly conflicting rules from different agencies – applies equally to the LOC rules, Vitter and Tester argued, “to ensure that new rules on one segment of the mortgage finance industry do not crate perverse unintended incentives. The focus should be on getting these rules right,” the legislators added, “not on getting these rules done right now,” especially given the likelihood that the CFPB will rewrite them in a few months.
Rep. Spencer Bachus (R-AL), chairman of the House Financial Services Committee, has expressed similar concerns in a separate letter to Bernanke, citing complaints from “various stakeholders” that the regulation is “intentionally vague,” that the Fed has not issued sufficient guidance and that some of the guidance staff has offered has been inconsistent.
“Given the importance of the rule in protecting consumers as well as in ensuring a fair application to small businesses or companies that may experience significant job loss due to its implementation, we recommend that the Board delay implementation of the final rule and provide proper written guidance to facilitate compliance by affected entities,” Bachus wrote. “Allowing additional time for implementation would help ensure that the final rule accomplishes the Fed’s goals while eliminating potential misunderstanding or confusion for all interested stakeholders.”
MORE LITIGATION
Mortgage-related litigation is on the rise – hardly a window-rattling revelation to anyone who has been following the news about foreclosure flaws, robo-signing attorneys, and consumer advocates who are recommending strategies delinquent homeowners can use to defeat foreclosure actions against them. Somewhat more surprising – most of the suits plaintiffs filed against mortgage lenders and servicers haven’t alleged improper foreclosures; they have targeted failures in the loan modifications designed to avoid them. And a significant number of the suits were initiated not by borrowers but by investors who purchased the loans.
The “Mortgage Litigation Index,” produced jointly byMortgage Daily and the Washington, D.C. law firm Patton Boggs, increased by 42 percent in the fourth quarter as plaintiffs filed 151 mortgage-related law suits compared with 106 in the third quarter. Foreclosure suits and investor suits nearly doubled while modification-related activity increased by more than 200 percent.
A nationwide investigation of foreclosure “abuses” and mortgage servicing practices launched by state attorneys general and related inquiries by courts and legislators, “have fostered an environment where mortgage-related litigation has expanded on all fronts,” according to Anthony Laura, a partner in the law firm’s Newark office, specializing in mortgage banking issues.
Although the ongoing investigation, and most of the publicity surrounding foreclosure problems have focused on consumer complaints, the investor suits are likely to prove more problematic and more costly for financial institutions, Laura noted in a press statement, because hundreds of millions of dollars are often at stake in those loan portfolio repurchase cases.”
While mortgage lenders are seeing an upward trend in litigation, securities lawyers are reporting a decline in securities class action settlements, which fell to their lowest level in more than a decade, reversing what had been a steady climb.
That’s according to an analysis by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, which also reported declines in both the aggregate settlement value ($3.1 billion in 2010 vs. $3.8 billion in 2009) and the average settlement, which slid about 2 percent to $36.3 million from $37.2 million.
But the median settlement amount jumped by more than 40 percent to $121.3 million compared with $8.0 million in 2009, representing the largest percentage increase in the past decade and the first time the median has exceeded $10 million.
The median settlement is the number that attorneys in the securities field watch, according to Matt Larrabee, a partner in the San Francisco office of Dechert, who told National Law Journal, “If you exclude the mega settlements, that’s what most people experienced in 2010.”
An increase in complaints filed by the Securities and Exchange Commission is partly responsible for driving median settlement amounts up, according to Larrabee, but plaintifffs’ attorneys are becoming more selective about the cases they bring, he noted, and that is also contributing to this trend. “The plaintiffs bar is bringing what they would describe as stronger cases, and following t SEC actions more closely,” Larrabee observed in the NLJ article.
Laura Simons, senior adviser to Cornerstone, underscored that point in a press statement released with the research report, noting that SEC-initiated actions typically involve “relatively high damages and large defendants, who not surprisingly, tend to settle for higher amounts.”
STUDENT LOANS
Concerns about default rates on student loans are growing and they are justified. For every student loan borrower who defaults at least two more become delinquent at some point within the first five years after entering the repayment period, and fewer than 40 percent of borrowers are able to repay their loans in full and on time, according to a new report by the Institute for Higher Education Policy. The repayment experience has probably dimmed further, the report suggests, as the economy downturn has reduced employment opportunities for new graduates and increased unemployment rates for many workers who still have outstanding student loans.
College seniors who graduated in 2009 had an average of $24,000 in student loan debt, up 6 percent from 2008, the New York Times reported, citing an annual report from the Project on Student Debt.
Default rates have also been increasing, as rising tuition costs have forced students to borrow more while rising unemployment rates have made it more difficult for students and their parents to repay the loans. Default rates reached 7 percent in 2007, compared with 5.2 percent in 2006, according to the NYT report.
Students who graduated were less likely overall to default than those who did not, but that did not hold true for two-year, for-profit schools, where more than half the students who graduate defaulted and more than three-quarters faced serious repayment problems. At private non-profit colleges, by contrast, 38 percent who dropped out experienced repayment problems, with only 11 percent defaulting.
Congress is considering proposals to end federal aid to schools at which graduates have high delinquency and default rates on their student loans. For-profit colleges enroll only about 12 percent of all students but they receive nearly 25 percent of federal student aid and account for nearly half of the students who default on their loans.
Critics of for-profit schools say the IEHP study supports their argument that stricter regulation of these schools is needed.
Commenting on the study, Stephen Burd, author of a blog called ‘Higher Ed Watch,’ observed, “While this data is not nearly complete, it certainly provides further proof that a large number of these two-year proprietary schools are leaving the low-income and working-class students they serve worse off than before they enrolled, loaded down with unmanageable levels of debt and without the training they have been promised.”
REGULATION REVISED
Responding to pressure from the Community Associations Institute (CAI), the Federal Housing Finance Administration has revised a proposed regulation that prohibits Fannie Mae and Freddie Mac from purchasing mortgages on properties subject to deed-based transfer fees.
The regulations are aimed primarily at the long-term covenants developers have begun attaching to homes in large residential developments, triggering a payment to the developer every time the properties are sold. But as drafted initially, the restriction would have applied to all transfer fees, including those many community associations levy to fund reserves, offset operating expenses and finance capital improvements.
The transfer fee ban would have rendered an estimated 11 million condominium residences “instantly unmarketable,” CAI warned in comment letters urging the FHFA to rethink its proposal. The agency responded by adding language exempting transfer fees that benefit community associations or the properties in them.
“This was a critical revision for the financial health of tens of thousands of community associations,” CAI Chief Executive Officer Thomas Skiba, chief executive officer of CAI, said in a press statement. “Protecting traditional transfer fees is beneficial to homeowners, potential homebuyers, the associations and the housing market. The government should avoid doing anything that could stifle home sales and put communities in further financial jeopardy.”
The regulation, published in the February 1 Federal Registerpending final approval, will still apply to other deed-based transfer fees, including those that do not directly benefit common interest ownership communities.
Several real estate industry trade groups, including the National Association of Realtors and the American Land Title Association, have led the campaign to ban most private transfer fees, arguing that they provide a lifetime revenue stream for developers, while providing no benefits for homeowners or for the communities in which encumbered properties are located.
Praising the FHFA’s proposed rule, ALTA President Anne Anastasi said it will “limit the spread of this predatory scheme, which adversely impacts [the housing market.]”
According to industry reports, 19 states have approved legislation or are considering measures that would restrict or ban private deed transfer fees. Like the FHFA’s revised regulation, the state laws typically exempt fees imposed by community associations.
