The Dodd-Frank Act

The rule-making process has begun for hundreds of new laws in the massive financial reform act. How many will affect CUs?

October 1, 2010



  • CUs can expect additional regulatory burdens as a result of massive new financial reform legislation.
  • The debit interchange fee proposed rule should be ready by December 2010.
  • The Consumer Financial Protection Bureau will have authority over federally-insured CUs with more than $10 billion in assets and also privately-insured CUs.

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July in the wake of the most serious financial crisis in 70 years.

Its intent was to reform abusive financial practices, particularly with mortgage lending and systemic risks, and provide marketplace stability. The bill specifically addresses leverage ratios for systemically important financial institutions, enhanced supervision for bank and thrift holding companies, and a new consumer bureau with broad authority over consumer regulations, products, and services.

But the new law probably raises more questions than it answers: Is it the correct prescription for an ailing financial system? How effectively does it overhaul government oversight of the banking system? Will it prevent another crisis?

Historians, economists, and politicians will debate those questions for generations. Credit unions, on the other hand, have more immediate concerns. They want to know how the new law will affect their operations, and how significantly it will increase their regulatory burden.

Nestled in the bill’s 2,300 pages are more than 240 new rules. The good news for credit unions—if you can call it “good news”—is that only about 35 of the new rules will pertain to them, says Mary Dunn, senior vice president and deputy general counsel for the Credit Union National Association (CUNA), adding “we’re also reviewing changes to existing laws.” Still, there’s no question credit unions should brace for increased compliance responsibilities.

The law is complex, the language is vague, and the regulatory process itself is just beginning, Dunn cautions. But for now, here’s an overview of the top provisions affecting credit unions.

Debit interchange fees

Perhaps nothing garnered credit unions’ attention and CUNA lobbyists’ muscle more than the debate on Dodd-Frank’s interchange regulation. Introduced by Sen. Richard Durbin, D-Ill., the provision requires the Fed to intervene in setting debit interchange fees among other issues. Language in the bill offers a “carve-out” for issuers such as credit unions with under $10 billion in assets, holding them exempt from any Fed interchange rules. 

CUNA argued during the legislative process that any carve-out would be impractical and could actually create additional problems for smaller issuers, who could be pushed aside by more favorable deals between merchants and big issuers.

Credit unions sent legislators more than 600,000 letters and e-mails, and they made hundreds of Capitol Hill visits objecting to the interchange amendment. Although the grassroots and lobbying efforts secured some changes, the Durbin amendment prevailed. The bill requires the Fed to write rules on interchange fees for debit cards, requiring them to be “reasonable and proportional” to the “incremental” cost of the individual transaction. The Fed also must address fraud-related standards, network fees, and exclusive arrangements and routing.

Rep. Barney Frank, D-Mass., and chairman of the House Financial Services Committee, repeated assurances that credit unions and other small institutions would be exempted from the terms of the interchange fee legislation. Frank says that credit unions and other small issuers would also continue to be permitted to issue their debit cards without any market penalties. Even Durbin indicated he didn’t want credit unions to be hurt, Dunn says.

She says these and other comments serve as excellent notice of Congress’s strong intent to exempt credit unions and community banks from the reaches of the interchange provision. And it’s why CUNA continues to push for the Fed to write the exemption for small issuers into the regulation. “It’s the only way to provide the protections that Chairman Frank and others are anxious for credit unions to have.”

CUNA’s major concern is that once rules are implemented, merchants and marketplace incentives over time could drive debit-transaction processing to the lowest point set by the Fed for large issuers.

“There’d be no room for a two-tier pricing system to satisfy small issuers in the market,” Dunn says. At this point, “no one knows how the final rules will come out. We’re fearing the worst and planning for the worst, but we’re working to achieve the most favorable outcome we can.” Expect a proposal by December, she says.

Meantime, CUNA will continue to meet with legislators and policy makers. CUNA’s Interchange Working Group already provided feedback to the Fed’s survey to large debit card issuers. The survey seeks information on signature debit vs. PIN (personal identification number) debit or prepaid debit card programs; total processing costs; authorization costs; total clearing and settlement costs; and total posting costs. The Fed also will consider:

  • Network and account service costs including data and system security, card production and delivery, rewards programs, and cardholder inquirers and claims;
  • Fraud prevention activities and costs;
  • Routing procedures and the current use of exclusive network arrangements, restricted under the new interchange law;
  • Interchange fees paid to issuers and charged to acquirers;
  • Transaction-related fees charged to issuers and retained by a network; and
  • Additional transaction or other fees charged to issuers, acquirers, or merchants and retained by a network.

“We want the Fed to consider the needs of small issuers, too. But although three credit unions [with more than $10 billion in assets] will be subject to regulatory review, credit unions won’t be exempt from the impact of the final rules,” Dunn adds.

CUNA is encouraged so far that the Fed is looking at a broad range of costs to determine interchange pricing, she says. “We asked them to look at costs for staffing and training, call center processing, authorizing transactions, reissuing debit cards, and the entire debit infrastructure. And regarding fraud, we’re pushing for its review to be as all-inclusive as possible. We want the costs to be mitigated by interchange fees.”

CUNA’s goals regarding the interchange provision remain unchanged during the rule-making
process, according to Dunn:

  • Ensure the exemption is meaningful;
  • Avoid unintended consequences so small credit unions aren’t unduly harmed, especially on exclusivity and routing provisions; and
  • Preserve interchange income to the extent possible.

Consumer Financial Protection Bureau

Dodd-Frank creates a new Consumer Financial Protection Bureau (CFPB), which has broad general authority to implement financial laws, including more than 18 consumer protection laws like the Truth in Lending Act, Truth in Savings, Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and Real Estate Settlement Procedures Act. The Federal Reserve, the National Credit Union Administration (NCUA), and other federal financial agencies will transfer their rule-making authority with respect to those consumer laws to the CFPB anywhere from six to 12 months after the July 21, 2010, enactment date, or possibly later if the Treasury Secretary chooses to extend the effective date.

The CFPB holds supervision, examination, and enforcement authority over federally-insured credit unions with more than $10 billion in assets and likely privately-insured credit unions of any size too, adds Michael Edwards, CUNA’s counsel for special projects. NCUA and state regulators generally retain supervision and examination authority over federally-insured credit unions with $10 billion or less in assets, and will have “exclusive” enforcement authority over those institutions, he explains.

The CFPB does have limited authorities for smaller institutions, however, Edwards notes, including the authority:

  • To accompany NCUA examiners “on a sampling basis” (not clearly defined in Dodd-Frank but where bureau staff might jointly participate in regular examinations);
  • To require reports regarding compliance with consumer protection laws; and
  • To refer suspected violations to NCUA.

Also, Edwards says, this new governing body comes at no additional cost to credit unions. It’s established within and funded by proceeds from the Federal Reserve System. It will have a single director as the agency head, which the president will appoint and the Senate will confirm for a five-year term. “It’s a lot of power for one person,” he adds.

But legislators also created a Financial Stability Oversight Council—made up of financial institution regulators and other agencies and led by the Treasury Secretary—that can nullify any CFPB regulation with a two-thirds vote if the council believes it’s unsafe or unsound. The existence of this power hopefully will encourage the CFPB to exercise its rule-making power with some degree of restraint, says Edwards.

Statutory provisions will generally be effective when the CFPB issues rules. But if they are effective before rules are issued, “credit unions need to make good-faith efforts to comply as best they can without the rules,” CUNA’s Jeff Bloch emphasizes. That’s important in case your compliance with the new rules is ever challenged, says Bloch, senior assistant general counsel.

Executive compensation and Reg CC

Dunn points to other key Dodd-Frank provisions for credit unions:

  • Executive compensation: By April 21, 2011, credit unions with more than $1 billion in assets will be required to file a report with NCUA regarding executive compensation. The purpose is to determine if the compensation is excessive or could lead to a material loss for the insurance fund.
  • Regulation CC (The Expedited Funds Availability Act):Credit unions will have to make available the first $200 of a check deposit by the next business day, up from $100. The Fed is currently rewriting the reg.
  • Appraisals: Expect a proposed rule this month requiring written appraisals and a physical property visit before approving certain “higher-risk mortgages.” Second appraisals also may be
  • required under certain situations.
  • Business accounts:Noninterest-bearing share draft accounts, often provided to businesses, now receive a full insurance guarantee until Jan. 1, 2013.
  • Credit ratings:A new Office of Credit Ratings within the Securities and Exchange Commission will administer rules for all ratings agencies to determine accuracy and minimize conflicts of interests. NCUA will review its investment and corporate credit union regulations for language mentioning ratings agencies.
  • Share insurance:Insurance coverage through the National Credit Union Share Insurance Fund is now permanently raised to $250,000, from $100,000.
  • Remittances:Credit unions that offer cross-border electronic funds transfer services to their members, whether or not those services are typically considered “remittances,” will eventually be required to provide consumers with new disclosures providing a rough estimate of the amount of money the consumer will receive (after fees and foreign exchange rates). Credit unions will be exempt from the most onerous aspects of Dodd-Frank’s “remittance transfer” requirements, however. The new rules won’t likely take effect until about January 2012.

Technical corrections ahead

The Dodd-Frank Act was an exhaustive legislative process, says Ryan Donovan, CUNA’s vice president of legislative affairs. And Congress still might not be done. A technical corrections bill is “almost a certainty,” given the size and the very public way the legislation was created, he says.

While lawmakers generally try to keep corrections to necessary revisions, Donovan says it could be an opportunity for CUNA to identify areas that are problematic to credit unions and address statutory concerns.