Countdown to Compliance: The real cost of Dodd Frank 1073

By: Mike Rockouski and Mark Hill

September 18, 2013

In a matter of weeks, financial institutions in the U.S. will have to comply with a new fed­eral law on remittance transfers that could pose significant risks.

Part of the complex Dodd-Frank Act, Reg­ulation E kicks in on October 28 and affects consumer-initiated, international electronic funds transfers, also known as remittances.

Regulation E requires remittance trans­fer providers to make certain disclosures to consumers making payments to recipi­ents overseas.

But while the goal of the new rule is to protect consumers, ultimately it will cost consumers by driving up the price of remit­tance services, an industry in the U.S. that in 2010 saw more than $37 billion worth of in-cash and in-kind transfers made to foreign households. Certain financial insti­tutions might not be able to afford the new compliance costs of Regulation E, and elect to get out of the funds transfer business alto­gether, providing less choice for consumers.

What’s changing?

Under Regulation E, financial institutions will be required to provide a pre-payment disclosure outlining the total cost of send­ing the transfer, including service fees, the exchange rate and the amount of money the recipient will receive.

In addition, the new rule creates error resolution and cancellation rights for send­ers of remittance payments. It also includes a safe harbor clause based on 100 or fewer transfers in the previous or current year.

To ensure compliance, financial institu­tions must ensure they have the systems in place to give the pre-payment disclosure information to the sender, process the ap­proval, and time the 30-minute cancellation period before the final disclosure is received.

Some of the larger banks will be able to comply with Regulation E by processing the pre- and post- payment disclosures in house, but other financial institutions will have to absorb the costs of compliance. Those costs will be passed onto the consumer, who when faced with higher fees for a remittance transfer, will likely start considering other methods of sending a payment overseas. This could in turn, lead to a slowdown in consumer-originated payments in the U.S.

The challenge

Some members of the banking industry worry the new rule will result in non-banks, which are generally U.S. based, to become preferable to banks for customers making transfer transactions. But everyone who wants to continue processing international transfers has to follow the rules.

In response to criticism in the early draft­ing stages of Regulation E, the U.S. Consum­er Financial Protection Bureau has already tweaked some aspects of the rules to make it less onerous, including a requirement for financial institutions to disclose the amount of foreign taxes in the recipient’s country.

Still, the newly amended changes might prove to be too much of a headache for some financial institutions, some of which are debat­ing whether to continue processing interna­tional wire transfers or at least stay within the limits of the safe harbor clause.

Although corporates are likely not think¬ing much about Dodd-Frank 1073, the law could have an impact in the future. During a payments conference last year, Richard M. Fraher, vice president and counsel to the RPO, Federal Reserve Bank of Atlanta, implied that banks’ corporate customers will likely begin to demand more detailed disclosures.