Federal Reserve Must Face Bank Suit Over Credit Card Fee Rules

Federal Reserve Chairman Ben S. Bernanke
Federal Reserve Chairman Ben S. Bernanke. Photographer: Chris Rank/Bloomberg

Federal Reserve Chairman Ben S. Bernanke lost a bid to end a bank lawsuit challenging the legality of forthcoming rules limiting the amount of money the largest U.S. banks can collect for debit card transactions.

U.S. District Judge Lawrence L. Piersol in Sioux Falls, South Dakota, yesterday denied the U.S. government’s request to throw out the case filed last year by TCF National Bank. He also rejected the bank’s request to block the regulations and allowed the case to move forward while Congress debates the issue.

“People should know where they stand,” the judge said, announcing the ruling after almost three hours of argument over the bank’s claim that the rules, which still aren’t final, are unconstitutionally confiscatory.

TCF bank, a unit of Wayzata, Minnesota-based TCF Financial Corp., sued Bernanke and the Fed’s Board of Governors in October challenging the legislation appended to last year’s Dodd-Frank financial regulation overhaul bill.

The provision, sponsored by Democratic U.S. Senator Richard Durbin of Illinois and known as the Durbin Amendment bars banks with more than $10 billion in assets from collecting from retailers more money per debit-card transaction than the actual cost of providing that service.

Visa Inc., the world’s biggest electronic-payment network, and MasterCard Inc., the second largest, set the fees, also called interchange, and then pass the money to the card-issuing banks.

Swipe Fees

Under the Dodd-Frank law, the Fed must adopt rules to limit “swipe fees” that merchants remit in exchange for being able to accept the cards for payment.

Bernanke last month advised Congress the board is still reviewing the more than 11,000 comments it’s received about the measure and will miss an April 21 deadline for issuing the regulations required by the Durbin Amendment.

The Fed in December proposed capping debit interchange fees at 12 cents a transaction, compared with the current formula that averages 1.14 percent of the purchase price, or 44 cents. The regulations are due to take effect on July 21.

“We’re going to lose $6 million per month,” Timothy D. Kelly, a TCF National Bank lawyer, told the judge yesterday. “We can’t recover it from the government, and we can’t recover it from the retailers.”

The Sioux Falls-based unit of TCF Financial makes about $8 million a month on the fees, Kelly said. It sued the Federal Reserve Board trying to bar the rules, mandated by Congress, that it says will make it lose money on debit-card services.

Meritless, Premature

The government, asking Piersol to throw out the case, said the suit is meritless because Congress has ample authority to regulate banks and premature because the rules under attack haven’t been enacted.

“This is not a fundamental right,” Justice Department lawyer Bradley Cohen told the judge, referring to the bank’s rate of return on its debit-card service. Cohen said the regulation is designed to protect merchants and consumers.

“This has a real-world effect,” Cohen said. “This is important and a big deal to retailers.”

U.S. debit-card transactions climbed from about 8 billion in 2000 to 38 billion in 2009, Bernanke said in his March 29 letter to a congressional committee. The cards have surpassed checks and credit cards as the most frequently used noncash means of payment, he said.

Interchange is the biggest component of the fees U.S. merchants pay when they accept Visa and MasterCard debit cards. Debit-card interchange exceeded $16 billion in 2009, according to the Fed.

Congressional Debate

The bank’s bid for court-ordered relief comes as Congress debates the Fed’s rulemaking.

Piersol, after denying request for relief from both sides, asked attorneys for the government and bank to submit proposed orders to him.

Cohen declined to comment after the judge’s ruling yesterday.

Piersol had told the parties that the application of the Durbin Amendment only to banks with more than $10 billion in assets “gives the court some pause,” because it may violate the U.S. Constitution’s requirement of equal protection under the law.

TCF Chairman and Chief Executive Officer William A. Cooper attended the hearing.

“I think everybody is uncertain as to what this all means,” he said later in a phone interview. “He seemed to be very encouraging on the issue of equal protection.”

Legitimate Expectation

The judge also said the bank had a legitimate expectation of receipt of its swipe fees under its contracts with Visa and Mastercard.

Still, he said, he wasn’t ruling on the merits of the bank’s claims.

TCF Financial said in its lawsuit, filed Oct. 12, that the provision would put the biggest U.S. banks at a competitive disadvantage by forcing them to provide debit-card services below cost while exempting smaller institutions.

“The purpose of sound regulation is to introduce or advance competition, not to destroy it,” TCF’s lawyers wrote in a court filing, alleging the measure is unconstitutional. The new rules might mean a $75 million to $90 million drop in swipe-fee revenue, TCF Financial Vice Chairman Gregory Pulles said in a separate filing.

The bank “merely has a unilateral expectation of receipt” of swipe fees, the U.S. said in a court filing.

‘Constitutionally Permissible’

Even assuming TCF had a viable property right in future fees, its claims are premature because the court can’t yet know if TCF will receive a “constitutionally permissible” rate of return, the government said.

TCF Financial revenue last year topped $1.2 billion, according to its year-end filing with U.S. securities regulators. It claims more than $18 billion in assets, which its lawyers said makes it “hardly a ‘big’ bank” when compared with others in its regulatory class.

Bank of America Corp., the largest U.S. bank, had assets of almost $2.3 trillion at the end of 2010, according to Bloomberg data. JPMorgan Chase & Co. had $2.1 trillion; Citigroup Inc., $1.9 trillion.

With operations in Minnesota, South Dakota, Illinois, Michigan and four other states, TCF was the 22nd-biggest U.S. debit-card issuer in 2009, with $7.31 billion in transactions processed on 2.27 million debit cards, according to the Nilson Report, an industry newsletter in Carpinteria, California.

The case is TCF National Bank v. Bernanke, 10-cv-04149, U.S. District Court, District of South Dakota (Sioux Falls).

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