League backs NCUA preemption on interchange fees, asks for state charter protections

NEWS: Yesterday, The League submitted a comment letter on the NCUA’s Interim Final Rule to clarify the power of federal credit unions (FCUs) to charge non-interest charges and fees, including interchange fees, on credit and debit card transactions, under the Federal Credit Union Act. The rule is intended to preempt any state law affecting such charges and fees, including the Illinois Interchange Fee Prohibition Act (IFPA).

In addition to backing the preemption rule for FCUs, we asked the NCUA to go further and preempt these kinds of harmful state laws from applying to state-chartered credit unions, too.

Background

The IFPA bans credit unions, banks, payment networks and other entities from charging or receiving interchange fees in Illinois on the portion of a debit or credit card transaction attributable to taxes or gratuities (i.e. tips). The enactment of the IFPA set off a chain of litigation about the scope of a state’s ability to regulate national banking entities, including FCUs. Other states are considering similar interchange fee limits.

Such limits would be nearly unworkable in America’s payment processing systems, but credit unions (and others) could face onerous penalties if they fail to comply and excessive burdens trying to find workarounds to prevent charging fees not allowed by the IFPA.

Preemption essentially means that federal law already governs a certain issue, and so the federal law preempts any state law that “prevents or significantly interferes” with the operation of the federal law. Thus, the NCUA’s rule means that a state law on credit or debit card interchange fees cannot apply to FCUs. It also makes clear that FCUs may assess these charges and fees even when they are set by or in consultation with third parties.

The rule not only clarifies the NCUA’s authority over FCUs’ fees, but it also avoids any disparity between FCUs and national banks, since the federal Office of the Comptroller of the Currency (OCC) issued a similar preemption rule earlier this year. Based on the OCC’s rule, the U.S. District Court for the Northern District of Illinois has now permanently enjoined enforcement of the IFPA against national banks, federal savings associations, out-of-state banks covered by the Riegle-Neal Act, and payment card networks. That injunction did not include any credit unions, unfortunately, but we hope that the court will soon enjoin IFPA enforcement against FCUs, as well, because of the NCUA’s new preemption rule.

In the wake of the court’s ruling, Illinois lawmakers recently passed a law delaying the IFPA’s effective date for a year, until July 2027.

Requesting help for FISCUs

In our comment letter, The League told the NCUA that we back preemption for FCUs, which should have equal footing with national banks. “However, FCUs are not the only credit unions that should be shielded from the IFPA,” we wrote. “We ask the NCUA to consider including federally insured state-chartered credit unions (FISCUs) within the scope of its preemption [rule]. All but two Wisconsin-based credit unions are FISCUs. Leaving state-chartered institutions to fend for themselves against the IFPA (and similar laws that states around the nation are considering) will impose unfair burdens and hardships on FISCUs alone.”

We explained why we believe the NCUA may have legal authority to preempt FISCUs from state interchange fee limits. (We even quoted the legal analysis from a 2018 NCUA Legal Opinion Letter, which the agency issued in response to a request from The League, regarding the preemption of certain Wisconsin laws that restrict the use of the word “bank.”) Perhaps just as importantly, we stressed the serious consequences IFPA compliance would have on FISCUs, including increased costs for members and even the risk that some credit unions might be forced to suspend credit and debit card services.

Across-the-board parity is crucial for all credit unions and banks because they all use the same payments systems. Subjecting only FISCUs to interchange restrictions would put them at a distinct competitive disadvantage (yet yield no additional protection for consumers). FISCUs comprise a major portion of the credit union movement, and they should have the same preemption protections that FCUs have. Preempting such state laws only for the benefit of FCUs, and not FISCUs, would create safety and soundness issues. FISCUs face the same extreme compliance costs, operational burdens, and onerous penalty exposures under IFPA-style statutes that the NCUA has cited as a justification for issuing its [preemption rule].

If the NCUA determines that it lacks legal authority to exempt FISCUs from state interchange fee limits, we asked them to at least add language to their preemption rule that could help bolster court arguments by FISCUs against such laws in the future.

The League will alert you when the NCUA takes further action on its preemption rule.

Compliance Roundtable – September 16 (In-Person)

Join members of The League’s compliance team as they lead a discussion on the latest changes in regulations and need-to-know information to keep your credit union in compliance. You can find more information or register on our website.