Monday, April 11, 2011

Barney Frank, the Durbin Amendment and Swipe Fees

How would you like to have your name on a piece of major legislation and then find yourself supporting a second piece of legislation that blocks part of it?  That is the awkward position that Congressman Barney Frank, (D-MA) now finds himself in.  Barney is the "Frank" in "Dodd Frank" but last week he agreed to support HR 1081 which will delay implementation of the Durbin amendment which regulates debit card "swipe fees."  Last week HR 1081 had 71 supporters in the house. A companion bill in the Senate (S 575) by Jon Tester(D-MT) also seeks to delay the Federal Reserve from implementing the Durbin amendment. Tester's bill S 575, introduced March 15, "The Debit Interchange Fee Study Act" would suspend implementation of the proposed rule on debit fees for two years and call for a one year study of debit interchange fees.
Frank's support of the amendment is by no means altruistic.  The Durbin Amendment has powerful enemies (Jamie Dimon, CEO of JP Morgan Chase has referred to the Durbin Amendment as price fixing.)  And the outcry against the Durbin amendment is apparently having an effect--Fed Reserve chair Ben Bernanke says that the Federal Reserve will not be ready with its interim rule on swipe fees in time to meet the April deadline. (I notice that the Fed had no such trouble meeting its deadlines on the loan origination compensation issues.) 

The issue here will sound very familiar to those of us who have just suffered through the loan originator compensation rules.  The Federal Reserve Rule on debit card interchange fees will cap the interchange fee per debit card transaction at 12 cents, regardless of the size of the transaction. As a result, small banks are likely to limit the size of debit card transactions or cut off access to free checking.

What matters to us as small business owners is the logic behind introducing a bill to delay implementation of the Durbin amendment.  Jon Tester has posted his press release on his website, which you can read at  Consider this quote from Pat Roberts (R-KS), a cosponsor of the bill, on the issue of the debit card fee controls, "The government should not be in the business of setting price controls on any product, and implementing this rule would set a precedent for that. We need more time to sufficiently review this regulation, because failing to get it right ultimately means it will fall on the backs of consumers, merchants and financial institutions, including our small community banks. And at a time when Americans are watching every penny, we cannot afford to let that happen."  Fellow co-sponsor Bob Corker, (R-TN) adds this, "The federal government shouldn't be telling private companies what they can charge for goods and services; that's price fixing, and that's exactly what the Durbin amendment does....The hastily passed Durbin amendment will have numerous unintended consequences for debit card users, including reduced access and increased fees." Senator Mike Lee (R-UT) Ranking Member on the Judiciary's subcommittee on AntiTrust, Competition Policy and Consumer Rights, says, "Price controls are almost always problematic....If the rule remains in place, retailers, banks and consumers will lose out in the long run through higher costs and limited choices. I believe that we can form a better solution that does not unnecessarily burden small businesses and local financial institutions or pass fees on to the customer."

What is remarkable to me about this is that every single one of these arguments could apply to the Fed Rule on loan originator compensation.  (In fairness, Jon Tester did sign a letter to Ben Bernanke asking him to delay implementation of the rule).  What is the Fed Rule on loan originator compensation except the government telling private businesses what they can charge for goods and services? The Fed Rule on loan originator compensation certainly limits choices to consumers and ultimately raises the prices of mortgages.  The Merkley Amendment (part of the Dodd Frank bill which sets limits on loan originator compensation) was easily as hastily passed as the Durbin amendment. The country does not have to wait for the Durbin amendment to set a precedent for federally mandated price controls--the Fed Rule on originator compensation has already started us down that road.

What I see as good news in this situation is that the fact that these Senators have gone on record expressing their support for a free marketplace and that could bode well for us.  Of course, on April 1, Senator Jim DeMint introduced S 712 which would repeal the Dodd Frank Act in its entirety, and that is the best option. But barring that, maybe we as an industry need to be looking towards getting support for our own amendment, "The Loan Originator Freedom Act". 

If price fixing and federal control of what private companies can charge are wrong in one case, they are wrong in all cases.  We just need to get the word out to our elected officials that we, too, have a right to set our own fees within the framework of a competitive marketplace.

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