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U.S. bankers are asking Congress to halt a proposed Dodd-Frank regulation that would cut debit card revenues by claiming it would also discourage smaller banks from making “job-producing loans.”

The American Bankers Association sent a letter on Tuesday to all members of Congress asking lawmakers to “intervene immediately” to stop the Federal Reserve’s proposed cap on so-called interchange fees, which now generates billions in revenue for the banking industry. It also asked member banks across the nation to lobby their lawmakers.

The ABA is well-known on Capitol Hill. It spent more than $38 million on federal lobbying since 2006 and its political action committee contributed $3.7 million in the 2010 election cycle, mostly to Republican candidates.

In December, the Fed proposed a stricter cap than the industry had expected, which would limit big U.S. banks to about 12 cents per debit card transaction. Interchange fees now amount to an average of about 44 cents per transaction, generating some $16 billion in annual debit card swipe fees, according to the Fed.

The proposal has the banking industry reeling. Bank of America Corp., the biggest U.S. bank, recently said it expects to lose $1 billion in debit processing revenue beginning in the second half of 2011.

“This lost revenue would impair capital growth and reduce the ability of banks to make job-producing loans that support a growing economy,” the ABA letter to lawmakers said.

Although the Fed’s proposal would apply only to big U.S. banks with more than $10 billion in assets, the ABA said market competition would force smaller banks to adopt the same debit fee level. “These institutions are key to growing the economy and helping small businesses create more jobs. Proposals like the debit interchange rule would only further harm these banks by dramatically reducing revenues with no real benefit to the consumer,” the letter said.

Consumer groups and retailers support a limit on interchange fees.

Sen. Richard Durbin, the Illinois Democrat who authored the Dodd-Frank law language requiring the Fed to limit debit card fees, contends that small banks won’t be hurt. “It’s time to move past the misrepresentations and scare tactics and to recognize the strong pro-consumer and pro-competitive benefits of interchange reform,” Durbin said in a statement last month after Visa announced it would launch a two-tiered fee for large and small banks.

The Fed has already received more than 2,000 e-mails, mostly from banks and credit unions, on its proposed fee limit ahead of the Feb. 22 deadline for comments. If finalized, the cap would take effect on July 21.

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