The Consumer Financial Protection Act: The Creation of the Consumer Financial Protection Bureau and the Impact on Debit Card Interchange Fees

By David Brown, Esq.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).  This article discusses two of the most notable aspects of the Dodd-Frank Act: The creation of the Consumer Financial Protection Bureau (CFPB) and The Durbin Amendment, a short but controversial amendment to the Electronic Fund Transfer Act (EFTA) which establishes new restrictions to govern debit card transaction interchange fees.

The Creation of the CFPB

The CFPB was created by Title X of the Dodd-Frank Act.  Its mission is to protect consumers in the financial services sector of our economy by preventing unfair, deceptive and abusive practices by financial institutions.[1]  The idea behind the CFPB is explained in an article titled “Making Credit Safer” by Elizabeth Warren and Oren Bar-Gill – the leading advocates for a new agency focused on consumer credit.[2] That article suggests that, “[c]onsumer credit products . . . pose safety risks for consumers.  Credit cards, subprime mortgages, and payday loans can lead to financial distress, bankruptcy and foreclosure.”  Warren and Bar-Gill argue that government should regulate credit products, just as it regulates ordinary products such as toasters, to make them safer for consumers.[3]

The CFPB is expected to become the primary enforcer of the Dodd-Frank Act.  Additionally, the CFPB will regulate the offering and provision of any consumer financial product or service under the enumerated “Federal Consumer Financial Laws” of the United States.[4]  These include:

  • The Alternative Mortgage Transaction Parity Act of 1982
  • The Consumer Leasing Act of 1976
  • The Electronic Fund Transfer Act
  • The Equal Credit Opportunity Act
  • The Fair Credit Billing Act
  • The Fair Credit Reporting Act
  • The Home Owners Protection Act of 1998
  • The Fair Debt Collection Practices Act
  • Certain sections of the Federal Deposit Insurance Act
  • Certain sections of the Gramm-Leach-Bliley Act
  • The Home Mortgage Disclosure Act of 1974
  • The S.A.F.E. Mortgage Licensing Act of 2008
  • The Truth in Lending Act
  • The Truth in Savings Act
  • The Interstate Land Sales Full Disclosure Act

To get an idea of the CFPB’s intended size, its initial budget of $550 million is larger than that of the Consumer Protection Safety Commission, the Federal Trade Commission, and the Equal Employment Opportunity Commission.[5]

The CFPB has been granted broad investigatory powers to investigate all matters relating to “fair lending”.[6]  Specifically, it can conduct joint investigations with HUD or with the Attorney General and issue subpoenas.[7]  Additionally, before commencing litigation, the CFPB can serve document requests, requests for tangible items, interrogatories and notices of depositions.[8]  All evidence obtained by the CFPB will be kept confidential.
 
The CFPB has also been granted broad powers to conduct hearings and proceedings to enforce any Federal law regarding consumer finance.  Proceedings may be brought by the CFPB against any “covered person” or “service provider” as these terms are defined by the Dodd-Frank Act – basically anyone involved in consumer lending.[9]  After a hearing, or if the defendant defaults, the CFPB may order the defendant to cease and desist from any illegal activities, and/or may order the defendant to take affirmative action to correct the conditions that lead to the proceeding.[10]  The CFPB can also issue temporary restraining orders prior to the final resolution of a proceeding.[11]

Under the Dodd-Frank Act, there is no private right of action to assert any violations.  In other words, all actions must be commenced by the CFPB.[12]  If the CFPB chooses to act, it must initiate a civil action within three years from the date that the violation is discovered.[13]  Civil money penalties can be assessed and come in three tiers: (1) up to $5,000/day for any violation; (2) up to $25,000/day for a reckless violation; and (3) up to $1,000,000/day for a knowing violation.[14]  All criminal prosecutions must be coordinated with and brought by the Attorney General.[15]

In addition to its investigatory and prosecutorial powers, the CFPB will write rules as “necessary and appropriate” to implement and enforce the enumerated Federal Consumer Financial Laws.  It will also prescribe disclosure rules and model forms; research, analyze and report trends in consumer finance; monitor consumer usage of specific financial products; and collect and track consumer complaints.[16]  President Obama has not yet appointed anyone to oversee the CFPB, but is expected to do so within the next few months.
 
The Durbin Amendment

The Durbin Amendment is an amendment within the Dodd-Frank Act that establishes new restrictions for governing debit card transaction interchange fees.  For those who don’t know, interchange fees are fees that an issuing bank deducts from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant.[17]  Typically, these fees are set by the credit card networks such as Visa and MasterCard and represent about 2% of the total sale.[18]

Unlike credit cards, where the user borrows money from a creditor and pays it back at the end of the month, debit cards are directly tied to money in the cardholder’s bank account.[19]  The Durbin Amendment empowers the CFPB to cap interchange fees charged by banks during a debit card transaction by requiring that any interchange transaction fee must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.[20]  The Durbin Amendment only applies to lending institutions with assets worth more than $10 billion.  In other words, the CFPB cannot cap interchange fees between lenders with less than $10 billion in assets, or 99% of U.S. Banks.[21]  Government-administered payment programs and reloadable prepaid cards are also exempt from the Durbin Amendment.[22]

In theory, the Durbin Amendment is a way to reduce costs to the consumer by limiting the amount that banks can charge merchants for debit transactions.  In reality, though, the Durbin Amendment may cause more harm than good.  First, there is no evidence that indicates merchants are willing to pass along any savings realized to consumers.  Second, the credit card networks are responding by creating rate schedules that may significantly hamper competition.  Specifically, Visa recently indicated that it will introduce a dual interchange rate schedule for issuing banks and credit unions based on the Dodd-Frank Act.[23]  In other words, Visa will implement one rate for large institutions governed by the Dodd-Frank and a different rate schedule for those institutions that are exempt from the Act, because they fall below the threshold of $10 billion in assets.  Many think that this will lead merchants to only accept cards from the largest banks.  After all, those cards will have lower interchange rates which will translate to larger profits for the merchant.[24]  As a result, community banks and other smaller lending institutions will be injured as their cards will not be accepted by merchants looking to increase profit margins.  Consumers will also be hurt as they will be unable to shop at stores that refuse to accept the card that they have in their wallet.

Although still unknown, the impact that the Dodd-Frank Act and the Durbin Amendment will have on the financial sector promises to be substantial.  Certainly, increased regulation appears to be imminent. 

David S. Brown is an Associate in Commercial Collections based in the Cleveland office.  He can be reached at (216) 685-1062 or dbrown@weltman.com.

—–

[1] Bishop, Martin J., CFPA Q&A: How Big Will The Bureau Be?, The CFSL Bulletin, Aug. 24, 2010, http://www.cfslbulletin .com/2010/08/articles/bureau-of-consumer-financial-p-1/cfpa-qa-how-big-will-the-bureau-be/

The Consumer Financial Protection Board: Insights from Elizabeth Warren’s “Making Credit Safer”, September 16, 2010, http://www.pymnts.com/the-consumer-financial-protection-board-insights-from-elizabeth-warren-s-making-credit-safer-2/

[2] The Consumer Financial Protection Board, supra.
[3] Id.
[4] CFPA Q&A, supra.
[5] Id.
[6] Elkind, Thomas, Enforcement of the new Consumer Financial Protection Act, The CFSL Bulletin, September 1, 2010, http://www.cfslbulletin .com/2010/09/articles/consumer-financial-protection-4/enforcement-of-the-new-consumer-financial-protection-act/
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Javelin Strategy & Research, Financial Regulatory Reform 2010: Why the Dodd-Frank Act is Only the Starting Point for Reshaping Consumer Protections and Interchange, https://www.javelinstrategy.com/lp/Financial-Regulatory-Reform-2010
[17] Interchange fee, Wikipedia, http://en.wikipedia.org/wiki/Interchange_fee
[18] Mitchell, Stacy, Soaring Credit Card Transaction Fees Squeeze Independent Businesses, The New Rules Project, May 5, 2009, www.newrules.org
[19] 2010 Financial Reform and Debit Interchange Rates, http://interchangerate.com/?p=45
[20] The Consumer Financial Protection Act, supra.
[21] Admin, Wall Street Reform: The Consumer Financial Protection Bureau, Americans for Financial Reform, June 30, 2010, http://our financialsecurity.org/2010/06/
[22] The Consumer Financial Protection Act, supra.
[23] VISA to Offer Two-Tier Interchange Pricing, GBA e-Bulletin, http://www.gabankers.com/e-Bulletin/gba_bulletinJan142011.htm
[24] Id.

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