WASHINGTON — A Minnesota bank announced Tuesday it is suing the Federal Reserve to block new limits on debit-card transaction fees, one of the first lawsuits against a major provision of the Dodd-Frank financial overhaul law.
In its complaint, Wayzata, Minn.-based TCF National Bank argues that the law's prescribed debit card rules are unconstitutional because they will prevent TCF from making a reasonable rate of return on invested capital. The bank, which has $17 billion in assets, also claims that the law discriminates against it because it exempts financial institutions with less than $10 billion in assets.
TCF said it will file its complaint Tuesday in a U.S. District Court in South Dakota. TCF, which is chartered in South Dakota, has more than 440 branches in eight states.
"It is a unique, unprecedented assault on the constitution from a business perspective," William Cooper, chief executive of the bank's parent company, TCF Financial Corp., said in an interview.
At issue is a controversial amendment to the financial regulation law sponsored by Sen. Richard Durbin, D-Ill., that targets the "interchange fees" merchants pay debit card-issuing banks every time a cardholder swipes a debit card. Under Durbin's language, the law directs the Fed to write rules limiting banks to charging debit-related fees to retailers that are "reasonable and proportional" to the actual cost incurred by the bank.
Interchange fees on credit cards aren't included in the law.
TCF has chosen to file its lawsuit before the Fed has written the rules ordered by the Dodd-Frank law, a move that could make it more difficult for the firm to have early success in court.
But TCF officials said in an interview that they can't afford to wait for the Fed to act. The Fed is scheduled to issue a draft rule in early November, with the final rule due April 21. The new rules would take effect three months later, leaving TCF with little time to mount its challenge, the officials said.
The law gives the Fed very little discretion in which debit-card related costs banks can recoup via interchange fees and which it cannot, and the permitted processing costs would cover only a fraction of what it costs TCF to offer debit cards and manage its debit card system, the officials said.
So TCF decided to act now, "in light of the certainty that no rules that faithfully administer the [Durbin] amendment will allow TCF to maintain a profitable debit card operation," the complaint says.
Moreover, internal TCF analysis shows that trying to pass the lost cost on to consumers wouldn't work either, the officials said. The estimated $8 to $10 per month fee they would need to charge would cause their customers to leave TCF for other financial institutions that aren't covered by the Durbin provision, or switch to using credit cards, which TCF doesn't offer, they said.
The bank will also claim a provision in the law that requires TCF to offer its product below cost violates its constitutional due process rights.
It also argues that the exemption provided for smaller banks is unconstitutional. Only about 100 banks will be affected by the new rules, and the $10 billion cut off was a product of political calculation not economic analysis, TCF said.
Durbin settled on that figure, after initially proposing his provision apply to all banks with $1 billion or more in assets, in order to get enough votes to pass the amendment in the Senate, said Cooper, the CEO. But that exemption put "99% of the banks in America at a competitive advantage in a core retail product over those banks that are covered," he said.
Timothy Kelly, the lead counsel on the case for TCF, said the constitutional law on the issues is "clear as a bell" that Congress has proposed an unconstitutional regulatory framework. TCF's legal team also includes Richard Epstein, a constitutional law scholar at New York University's law school.
The Fed will have 60 days to respond to TCF's filing. But the bank plans to move for preliminary injunction — possibly within 10 days — to stop the Fed from implementing its regulations until a judicial review is completed, Kelly said. To win an injunction, the bank must convince the federal judge it will suffer irreparable harm if the rules aren't blocked.
Cooper said that his firm discussed the lawsuit with other banks that will be similarly affected but moving forward with a joint lawsuit would have taken too much time. He said it's likely that other firms will file briefs supporting the case.
He also said other banks are afraid to attract the federal government's displeasure. While they agree that the Durbin provision is unconstitutional, they believe that "in today's environment the government gets to do whatever they want," he said. "And we don't believe that."