New Regulations and the Impact on Housing

On May 19th, Acting Comptroller of the Currency John Walsh spoke before the Housing Policy Council of the Financial Services Roundtable. His remarks centered on challenges that continue to persist in the housing market, and the onslaught of new laws that may have the unintended consequence of delaying a full recovery further.

During Mr. Walsh’s remarks, he made the following comment: “Another factor that may be restraining activity in housing markets is the generally tighter outlook for residential mortgage credit. No one would want a return to the excesses that we saw prior to the financial crisis, but mortgage underwriting is tight right now, in part because of the huge degree of uncertainty around the direction of housing markets, the path of foreclosures, and the future of securitization, among other things."

Concerning recent regulatory proposals designed to curtail past abusive practices, he went on to say: “There are 15 to 20 new mortgage lending requirements in the regulatory pipeline, and their impact on the mortgage and servicing businesses will be more tsunami than simple wave…”.

No one argues against stopping the abusive mortgage practices of the past. In fact, all respectable bankers insist upon it. However, both legislators and policymakers need to exercise caution, so that the solution to these problems does not result in unintended consequences that negatively affect consumers.

Mr. Walsh commented further: “The real concern is the housing market and the millions of American homeowners who rely on it to acquire and trade their single biggest asset, their home; the millions more who aspire to home ownership; and the nation’s economic health, which is so dependent upon the strength of the housing industry... “.

And more: “Every law and every regulation, no matter how well defined, carries the potential for unintended consequences. How can we evaluate each rule, see how it works, and decide if adjustments are needed? How can we judge the individual, cumulative, and interactive impact of so many major new requirements affecting every aspect of the business?”.

Mr. Walsh sums up his remarks with the following: “Corporate America can’t grow and develop and compete with the rest of the world without a financial system that allows lenders to take on reasonable and manageable risks. Local communities won’t thrive without local banks that are willing to take some reasonable risk in the extension of credit and have the wherewithal to manage that risk. Families cannot buy homes and build wealth to improve their lives without lenders willing to take a chance on them. We need to make sure the pendulum doesn’t swing so far that in the process of reducing risk, we extinguish the impulse to take appropriate risks, stifle the economy, and hurt ordinary people. We need to find a middle ground that manages risk in the system without sacrificing the energy and vitality that has brought so much prosperity to so many...”.

As I’ve said in past comments, the primary source of revenues for the vast majority of traditional banks is the interest earned from loans we make to our local customers. We have money to lend, and at Monroe Bank & Trust, we actively seek customers and potential borrowers who demonstrate the ability to repay the loans they seek to expand their business, purchase a new car, or buy a home.

Congress and the regulators who enforce the laws that Congress makes need to insure that banks continue to have the ability to serve our customers, and that the new rules as explained by Comptroller of the Currency Walsh does not “restrain activity in the housing markets”, or inhibit lending in general.

Myths and Facts about Interchange

From the American Bankers Association

Background: When Congress approved the Dodd-Frank Act last year, it contained an amendment by Senator Richard Durbin (D-IL) that resulted in the Federal Reserve setting price controls on debit card interchange transactions. The Fed was directed to determine a “reasonable and proportional” fee for a merchant’s use of the debit card payment network, considering only certain “incremental costs” of clearing a specific transaction.

The Durbin amendment aimed to shift the cost away from big box retailers and merchants onto consumers, and the Fed proposed a very narrow rule that has exactly that effect. The Durbin amendment was an unrelated amendment added at the 11th hour to the Dodd-Frank Act without the benefit of any Senate hearings, study, or informed debate on it. In passing the amendment, Congress imposed a law that will really harm consumers, the economy, and banks of all sizes, including community banks.

Since this amendment became law, big-box retailers have circulated a number of myths about the intentions of legislation (S. 575 and H.R. 1081) that would further study this issue, as well as myths on the impact of the Fed rule on community banks, consumers, and even on gas prices.

To help you better understand this issue and to address some of the myths, ABA has prepared this Myths vs. Facts paper for your information.


Myth: Community Banks will not be impacted by the debit interchange price controls.

Fact: The so-called “carve-out” for banks with fewer than $10 billion in assets will not work and cannot be made to work because having two different prices for the exact same product is not sustainable. Market share will always flow to the lowest priced product. In fact, Federal Reserve Board Chairman Ben Bernanke said in testimony on May 12, 2011 before the Senate Banking Committee that he “can’t say with certainty” that the exemption will work, that there “are market forces that work against it,” and that there is “good reason to be concerned.”

The price cap proposed by the Federal Reserve is so low that it creates enormous economic incentives for retailers – especially big box stores – to adopt strategies to favor the cards with lower interchange rates. Simply put, the result for small banks is either losing customer accounts to the large banks or a loss of revenue that supports free checking and other valuable services, or both. Ask yourself – can community banks really survive in a marketplace where they’re the highest-priced provider in town?

Myth: The Tester/Corker (S. 575) and Capito/Wasserman-Schultz (H.R. 1081) bills “overturn” the Durbin debit interchange amendment.

Fact: S. 575 and H.R. 1081 simply call for a study – because so little examination was done before the Durbin amendment was adopted to consider the real harm it may cause for consumers, communities, and the community banks that serve them.

The bills seek to delay temporarily the Federal Reserve’s debit interchange regulation and call on government regulators to determine just what the impact of this amendment will be. Given that Congress passed the Durbin amendment at the 11th hour on the Senate floor, without any hearings May 2011 and with little debate, policymakers have never fully considered the potential consequences. It only makes sense to stop the process and examine the issue now before the real harm occurs.

As Chairman Ben Bernanke recently said to Congress, the Fed has received more than 11,000 comments on its proposed rule, many of which address the “complexity of the U.S. debit card market” and raise issues that are “significant to the payments system, its providers, and its users.”

Given that complexity and importance, wouldn’t it make sense to step back and revisit this issue?

Myth: Retailers have no choice; they have to accept and pay for debit cards.

Fact: Retailers are not forced to accept debit cards and can always choose to accept only cash or checks, as many do. Retailers choose to accept debit cards because of the value they bring – they speed up check-out, result in higher sales, avoid losses from fraud and counterfeiting, and are convenient to customers.

What’s more, under current rules retailers can offer discounts for customers who pay with cash or checks. This allows customers to choose whether they wish to pay a little more for the convenience of using their debit cards and allows the retailer to avoid paying debit interchange fees.

Some retailers (like gas stations) do offer discounts, but the fact that many don’t indicates that it is in their interest not to and that the price of accepting debit cards is appropriate for the benefits that debit card acceptance brings.


Myth: Small businesses will benefit from the Fed's debit interchange price controls.

Fact: Most small businesses will receive little – if any – benefit from the cap.

According to a recent Consumer Impact Study, small businesses are not likely to see large or quick decreases in the amount they pay for interchange since many have little debit card volume, and most (about 75 percent) pay a “blended” interchange rate based on all debit, credit, and prepaid card volume.

The real beneficiaries of the Durbin interchange amendment are big-box retailers, who will pocket bigger profits as banks are forced to provide them with debit services at below-cost, government-fixed prices.

Myth: Consumers will benefit from the Fed’s debit interchange price control.

Fact:Despite retailers’ claims that government-mandated price caps will allow them to reduce prices for consumers, nothing in the law compels them to and it is not clear they will.

In fact, Home Depot’s CFO recently said she expects the price caps to benefit Home Depot to the tune of $35 million per year. She said nothing about passing that benefit on to customers. The director of government affairs for Sears said in an email that the interchange rule should not be delayed because it will prevent retailers from pocketing an extra $1 billion per month. Again, she made no mention of passing savings on to consumers.

Even if retailers do pass savings on, the penny or two savings on a box of cereal pales in comparison to the use that banks can make of the same money to drive economic recovery. For every $1 of lost capital at a bank, it means $10 of reduced lending capacity – that’s a lot of capital that isn’t being used to help small businesses grow and generate jobs. It is almost certain that consumers will have to pay more for banking services as banks, particularly community banks, will not be able to absorb the loss in income.

Myth: Debit card interchange fees are responsible for high gas prices.

Fact: Don’t fall for it. Anyone driving by a gas station these days can see prices go up literally overnight, yet retailers claim they can’t raise prices fast enough to keep pace and are making less money.

Interchange isn’t the problem. In fact, what retailers can charge on a gallon of gas is fixed by contract with their suppliers – the huge oil companies that sell the gasoline.

The companies are making huge profits, an estimated $38 billion last quarter alone, but retailer profits are limited by contract – not interchange.

Myth: Retailers pay for 100 percent of debit card fraud.

Fact: Banks pay for most debit card fraud. Just ask the Federal Reserve (See p. 81741 of the Federal Register). As long as they obtain authorization and don’t make any errors in processing, retailers are guaranteed payment every time a customer uses his or her debit card at the register. Compare this to fraudulent checks, which may result in 100% loss for the retailer. The fraud losses absorbed by banks simply reduce the losses the merchants would have otherwise suffered.

What Are They Afraid Of?

By Floyd Stoner, ABA EVP, Congressional Relations


When practically every regulator responsible for banks’ and credit unions’ safety and soundness expresses concern about the negative impact of a proposal, should one a: Continue on course and see what happens, or b: Pause to examine the issue to see if changes to the proposal are warranted?

The answer -- as it applies to the Federal Reserve’s debit interchange proposal -- seems particularly obvious now, a day after both Fed Chairman Ben Bernanke and FDIC Chairman Sheila Bair repeated their concerns about the Durbin amendment’s impact on community banks.

“I can’t say with certainty [that the exemption will work], but I think … there is good reason to be concerned about it,” Bernanke told Sen. Jon Tester (D-Mont.), original sponsor of S. 575, a bill delaying implementation of the Durbin amendment pending further analysis of its likely impact. If the exemption doesn’t work, Bernanke continued, “it’s going to affect the revenues of the small issuers, and it could result in some smaller banks being less profitable or even failing.”

State supervisors of banks and credit unions agree. Two groups representing them laid out their concerns in a letter to House and Senate banking committee leaders this week.

"If economic pressures force small debit-card issuers to operate at a 12-cent interchange fee, it is possible that many banks and credit unions will stop issuing cards because their costs do not utilize the same economies of scale as larger financial institutions," the groups said. “This scenario raises safety-and-soundness concerns as a large revenue stream will be ceased, and will also incentivize further consolidation among debit card issuers and potentially drive bank customers and credit union members to alternative products outside of the banking system."

Given these serious concerns expressed by serious people, it’s difficult to understand why anyone would object to hitting the pause button on the Fed’s rule. What are the bill’s opponents -- the retailers -- afraid of?

ABA asked that very question in an ad that ran in Capitol Hill publications this week. We took the liberty of suggesting some possible reasons. Perhaps retailers are afraid, for instance, that a study would prove the small-bank exemption doesn’t work. Or that government-issued price caps will hurt consumers.

Perhaps they simply fear that the windfall they are on the verge of receiving will slip from their grasp.

Stack these fears up against Bair’s and Bernanke’s concerns about bank safety and it’s clear who the winner is.

Congress has the power to stop the rule before harm is done. It’s time for them to exercise that power.