Merchants blast credit union rule

Retailers, restaurants and other merchants urged the National Credit Union Administration this week to withdraw its new rule preempting an Illinois law that curbs card interchange fees.

The NCUA’s “interim final rule” for credit unions took effect June 30 as the agency said it had “good cause” within its authority to skip a normal notice and comment period. Comments were due Thursday, which was 30 days after the agency issued the rule on June 9.

The NCUA preemption allows credit unions to skirt the Illinois law, called the Interchange Fee Prohibition Act. The law prohibits interchange fees on the tax and tip portion of customer bills. Illinois was the first state to enact a law aimed at curbing payment card interchange expense for retail businesses.

By allowing credit unions to collect interchange fees set by Visa and Mastercard, the rule “simply green-lights anticompetitive conduct, in which credit unions impose supracompetitive fees under the cover of the networks’ ‘default’ rates,” the Merchant Advisory Group, the National Restaurant Association and the Retail Industry Leaders Association wrote June 30 in a joint letter.

“The Interim Rule is not only bad policy, it is also unlawful both in substance and procedure,” the three groups added.

The NCUA rule raises “significant legal and policy concerns,” the Merchants Payments Coalition wrote Thursday in its comments to NCUA.

The preemption effort “appears to authorize conduct that is difficult to reconcile with established federal antitrust principles, departs from longstanding expectations regarding competitive markets, exceeds NCUA’s authority under the Federal Credit Union Act (FCUA), and adopts an overly broad interpretation of federal credit union preemption,” the coalition wrote.

The agency’s rule “also rests on an inaccurate understanding of the modern credit and debit card payments ecosystem,” the group added.

The new rule specifically lets credit unions assess and receive interchange fees from payments made with credit and debit cards. Credit unions – which joined banks in suing Illinois officials over the law – supported the new rule in their comments to the regulator.

Some credit unions cited onerous compliance costs in their support of the preemption rule.

Logix Federal Credit Union in Valencia, California, said it processes about 219,000 transactions in Illinois each year, and has a potential $219 million noncompliance exposure from the state if it did not properly separate interchange from taxes and tips.

“Faced with that kind of exposure, our credit union may have to take steps that hurt members, such as declining card transactions in Illinois or ending service to certain merchants,” Logix Chief Legal Officer Nick Mitchell wrote in a June 30 letter to NCUA.

Genisys Credit Union of Auburn Hills, Michigan, has “deep concerns about our ability to continue offering card products to our members if we are forced to comply with a growing patchwork of complex state-specific laws, like the IFPA, that are not consistent with safe, sound, and efficient banking practices,” Brian Dowgiallo, Genisys’ vice president of risk management, wrote in a Monday letter.

On June 1, U.S. District Judge Virginia Kendall issued a permanent injunction blocking the card-fee prohibition with respect to national banks, non-Illinois chartered banks and card networks. But the judge said her injunction doesn’t apply to credit unions, savings banks or banks chartered in Illinois.

The decision – a reversal of Kendall’s decision four months earlier to uphold the law’s central section – came after the Office of the Comptroller of the Currency issued an interim final rule to preempt the Illinois statute. A federal appeals court remanded the case in May for Kendall to consider the effect of the new OCC rule.

The plaintiffs filed a motion June 12 asking Kendall to reconsider her ruling with respect to whether the Illinois law applies to credit unions, given the rule change NCUA had published three days earlier. Kendall told the parties to file briefs on the motion by June 29; her ruling on the matter is pending.

Merchants’ arguments against the NCUA rule largely mirror those they made against the OCC’s April rule, which preempted the Illinois law for national banks. That’s because NCUA said it consulted with OCC staff in writing the preemption rule “and is adopting language that is substantially similar to the language adopted by the OCC.”

The law would save Illinois businesses and their customers about $500 billion annually, according to the MPC, a coalition of convenience stores, restaurants, supermarkets and online merchants.

Four trade associations – the Illinois Bankers Association, the American Bankers Association, America’s Credit Unions and Illinois Credit Union League – sued Illinois in August 2024 over the Interchange Fee Prohibition Act, two months after Gov. JB Pritzker signed it.