WASHINGTON – A group of banks filed a class action lawsuit Thursday against the federal government over a congressionally mandated Federal Reserve rule reducing their dividend payments and diverting the funds to the highway trust fund.

The suit, filed by the American Bankers Association and Washington Federal – a Fed member bank with assets of $14.8 billion – was widely telegraphed last year when the ABA filed its comments to the Federal Reserve concerning its proposal to cut the dividend.

ABA President Rob Nichols said that when Congress passed the 2015 Fixing America’s Surface Transportation Act (known as the FAST Act), it violated not only the terms of Fed membership, but the trust between the business community and the federal government.


Paying Dividends

“The change to the statutory dividend rate upended Federal Reserve System policy that has been in place for more than 100 years,” Nichols said. “The FAST Act set a troubling precedent to target specific segments of the business community to meet broad public obligations like highway infrastructure. Every industry in this country is vulnerable if this is allowed to stand.”

Under the 1913 Federal Reserve Act, banks are required to buy stock in their regional Federal Reserve bank in order to become members of the system. That stock cannot be bought or sold, but yields a 6% rate of interest to compensate for its idleness. Nationally chartered banks are required to be members of the Fed system, while state-chartered banks can opt in or out of the system.

The 2015 highway bill included a provision that cuts the Fed's dividend payments for banks with more than $10 billion in assets to either 6% or the current interest rate on the 10-year Treasury note, whichever is less. The proceeds from that change were directed toward the highway trust fund, a move that banks and many other observers feared could set a troubling precedent that could be applied elsewhere. The suit estimates that the law resulted in roughly $1.1 billion being transferred to the highway fund in 2016.

The suit argues that the Fed – acting upon the direction of Congress – breached Washington Federal’s contract with the U.S. by rescinding the 6% dividend payment it and all similarly situated banks were guaranteed as stockholders in the Fed system. None of the contract documents Washington Federal signed to purchase its stock “includes a provision stating that the 6% dividend would be subject to change or that the contract would be subject to legislative changes to the Federal Reserve Act,” the suit says.

The change further violates the Constitution’s takings clause because it withheld payments inherent to the stock the bank purchased from the Fed system without compensation, the suit alleges.

The suit argues that the number of banks whose circumstances sufficiently match Washington Federal’s “are so numerous that joinder of all members is impracticable,” thus necessitating a class action suit.

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