CUs Mull Suit Challenging Interchange Amendment

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WASHINGTON – Credit unions on Tuesday were exploring whether to sign on to a suit filed by Twin Cities bank TCF Financial challenging the constitutionality of the new interchange amendment that may cap fees on debit card transactions.

TCF, an $18 billion bank, asked a federal court to restrain the Federal Reserve from enforcing the terms of the so-called Durbin amendment, which it says was enacted under the Dodd-Frank Financial Reform Act without any hearings, and which TCF claims discriminates between big banks and credit unions and those under $10 billion who would not be affected by the price-setting of the Fed.

Both CUNA and NAFCU said yesterday they are exploring whether to join the bank’s suit as amicus filers.

“The thousands of banks exempted from the Amendment will be free to continue to charge retailers the current debit card interchange rate and recover all their cost plus a profit. This will result in an irrational competitive disadvantage for banks such as TCF that are subject to the new regulations,” said the Wayzata, Minn., bank in its suit.

“It is unprecedented for Congress, or any regulatory agency, to mandate a fee charged in the free market that not only denies a reasonable rate of return on investment, but actually requires the rate to be lower than the incremental cost of providing the service,” said William Cooper, Chairman and CEO TCF Financial. “Furthermore, the Amendment affects only 1% of the nation’s banks, giving thousands of unaffected banks an unfair competitive advantage.”

The interchange amendment does three things. First, it established the Federal Reserve as the effective regulator of interchange paid on debit cards and directs the Fed to cut fees if they are found to be exorbitant or unfair. The amendment also bars Visa and MasterCard from engaging in certain anti-competitive practices, such as preventing retailers from offering discounts for the use of cash or for lower-fee cards.

“We believe these provisions violate our Constitutional rights on three separate grounds: the regulations take our property without just compensation and without due process of law; and they also deny us equal protection under the law,” Cooper said. “The statute makes no more sense than regulating the price of a Burger King hamburger solely to the costs of the meat and the bun. To stay in business, Burger King has to sell burgers at prices that cover more than those costs; it also has to cover costs such as paying an employee to make the hamburger and another employee to serve it, the cost of the building and maintenance, as well as the costs incurred to advertise and promote the product.

“Under the Durbin Amendment, TCF only gets to recover the cost of the bun,” he said.

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