Beating the Dodd-Frank Act in court will be a long shot, but TCF Financial Corp. is willing to try it — and called on others to follow its lead.
William Cooper, TCF's chairman and chief executive, said Tuesday that its lawsuit against the Federal Reserve Board to block caps on debit card interchange fees is about more than preserving revenue, and that the industry could face worse restrictions if it stands idle.
"In some ways, this is a line in the sand for the industry," an emotional Cooper said during a conference call with analysts to discuss TCF's decision to protest the so-called Durbin Amendment as an unconstitutional encroachment on property rights.
"If we don't clarify things now, we'll see a lot more of this," Cooper said. If the interchange rules aren't challenged, he said, lawmakers could eventually seek caps elsewhere, such as charges for mortgages and other products.
Objecting to the law on constitutional grounds makes strategic sense, but it might be a difficult tack, some legal experts said. "You can certainly bring a lawsuit, but can you win it?" asked V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker LLP. "You must make a hard case for economic discrimination, and it is a very challenging case to prove."
Regardless, several other banking companies are weighing their options on interchange fees and other aspects of Dodd-Frank. Unlike TCF, however, most are willing to wait to see how the Fed implements the slew of policies outlined in the law.
"There are plenty of opportunities to challenge the law," said a lawyer who asked not to be named, citing legal relationships with several banking companies.
Several said that TCF is taking an unusual step by challenging interchange fees before the Fed acts. TCF's complaint, filed Tuesday in the U.S. District Court for South Dakota against the Fed, argues that caps forcing certain banks to offer debit card interchange below cost strip the company's property rights without compensation and violates due process rights. The suit also takes aim at an exemption for smaller banks, which TCF said would put it and about 100 other banks at an unfair disadvantage.
Cooper said he is concerned that customers, irate over higher fees, could leave TCF and other big banks since the Durbin amendment exempts banks with less than $10 billion of assets from caps on interchange fees on debit cards.
"We filed the lawsuit now because we would like this matter resolved before the Fed comes out with rules," he said.
"It is possible or even likely that the Fed will have to go back to the Congress and say they need more time to survey and analyze the market," Cooper added. The Fed is scheduled to issue a draft rule early next month, with the final rule due April 21. It is expected to take effect in July.
TCF, of Wayzata, Minn., generates $100 million in annual revenue from interchange fees, though Cooper declined to say how much of that would be at risk if the caps are introduced. He complained that his $17 billion-asset company will have to charge customers more to help offset the revenue shortfall, while the rules will lower the costs of big retailers such as Wal-Mart Stores Inc. and Target Corp. Overall 2009 revenue at TCF was $1.16 billion, according to regulatory filings.
Comizio said TCF may have a difficult time arguing that distinctions based on bank size are unfair, noting that other laws and regulations do just that. He pointed to the Community Reinvestment Act, which subjects smaller banks to a less-onerous examination.
The Durbin provision is one of several in the Dodd-Frank law that creates different requirements for large and small banks. The law requires the Federal Deposit Insurance Corp., for example, to raise the minimum level of federal reserves but limits the cost of the resulting higher premiums to institutions with more than $10 billion of assets.
Systemically important firms, meanwhile, or those that have more than $50 billion of assets, are subjected to tougher scrutiny by regulators, including higher capital and leverage requirements.
The law also differentiates based on size when it comes to enforcement by the Consumer Financial Protection Bureau. Though all banks must comply with the new agency's rules, only firms with more than $10 billion of assets will be subject to regular examinations by the CFPB. Smaller banks will continue to face enforcement by the bank regulators.
Sen. Dick Durbin, D-Ill., said in a press release that TCF's lawsuit "not only fundamentally misunderstands the law regarding interchange fees, but it also ignores the facts."
He noted that the provision passed Congress by a wide margin, and accused TCF of supporting anticompetitive interchange practices that hurt consumers. "I look forward to this provision's day in court and am confident that our language will be found to be fair and constitutional," he added.
Cooper said that he had received considerable support from other banks, in the form of phone calls and e-mails, and the company expects many banks to file supporting briefs. Cooper did not name any banks that his company had spoken with.
"We'll cross that bridge when we come to it," Cooper said when asked how TCF would react if the lawsuit fails. "We've crossed the opt-in bridge, the [Troubled Asset Relief Program] bridge and everything else that has come out of Congress."
TCF would have no choice but to comply with the rule if its legal challenge fails given how integral debit cards are to checking accounts, Cooper said. "It would be like selling the hamburger without the burger," he said. "I can't expect my customers to accept a checking account that lacks the same features offered at other banks."
TCF has always been flexible and innovative, he said, while repeatedly declining to say how his company would adapt. "If this moves through we'll deal with it."
At the end of the call, the outspoken Cooper issued a rallying cry. "The banking industry needs to get off its butt and … jump-start this economy," he said. "We are not as unpopular as we were a year ago, because people have figured out that the economy doesn't move if the banking industry doesn't move."