Overturning a proposed debit interchange cap on legal grounds may set a precedent against exempting credit unions from future regulations that affect large banks and other financial institutions.
That possibility exists because TCF National Bank, the financial institution that has sued the Federal Reserve over the proposed debit interchange rule, has based part of its argument against the rule on the small-issuer exemption included in the rule's authorizing legislation.
The legislation mandating the cap sought to exempt debit card issuers with under $10 billion in assets from having to comply with the cap. In its most recent brief in the case, TCF argued that the exemption renders an already confiscatory law unjust as well as unconstitutional.
The theory is that, by exempting smaller banks, Congress insulated consumers from possible cessation of debit services by small banks unable to absorb the increased costs associated with lower interchange fees, the bank contended. "We think this proves too much. It is another way of saying that the rate cuts driven by the Durbin amendment are so Draconian that they could drive small banks out of the debit business and thereby hurt consumers who want debit cards from those banks, but it is entirely proper that larger banks suffer the same fate, and who cares about their customers who want debit cards," the bank argued, concluding the argument by way of an analogy.
"Could Congress knock the price of milk down 80% and then exempt all but the 60 largest dairies in the country? Would the hypothetical opportunity to raise butter or cheese prices save such a law from unconstitutionality?" the bank asked.
Credit union legal experts familiar with the case acknowledged the possibility that the case could lead to a significant legal precedent that could hurt credit unions, and one legal authority called the case "candy laced with poison" for CUs. But the experts largely doubted whether the case would be decided on the challenge to the small issuer exemption. They pointed out that the Justice Department had strongly challenged that part of the bank's argument before the U.S. District Court in South Dakota, which is hearing the case.
The bank's main argument against the law, according to its most recent filing, attacked it on the grounds that it represented an unlawful confiscation of property that violated the U.S. Constitution's Fifth Amendment.
The so-called "takings clause" is the amendment's last, reading "nor shall private property be taken for public use without just compensation." The bank's primary argument against the legislation authorizing the debit interchange cap is that it represents the U.S. confiscating its debit card income and using it to subsidize retailers.
In a preceding brief defending the law, the U.S. Justice Department had argued that the debit interchange revenue should not merit Constitutional protection because it was essentially ephemeral, subject to the vagaries of the bank's relationship with Visa, the organization that sets the debit interchange rate.
TCF heaped scorn on this argument, pointing out that while Visa does set interchange rates, the network did not claim the right to set the rate below the costs of issuing debit cards or conducting transactions. Doing so, the bank argued, would not be in Visa's own best interest.
"A farmer who agrees to fulfill a soup manufacturer's tomato needs surely may be tempted to bump up the price," TCF wrote. "But Visa itself makes no more money if it lowers interchange or if it raises interchange. Visa's self-interest is to price interchange so as to maximize transaction volume."
"TCF and other bank issuers have built profitable debit franchises based on the certainty that Visa will (as it always has) establish interchange rates nationally and in its self-interest."
Pushing for a Delay
CUNA and NAFCU are weighing in on behalf of a bank's lawsuit challenging the constitutionality of the Fed's interchange rule and are also backing legislation that would delay the implementation of the rule.
At press time, CUNA and NAFCU were preparing to join other interested groups in filing a friend of the court brief in support of TCF National Bank's lawsuit against the debit card interchange fee provisions of the Dodd-Frank Act.
They were also backing legislation that Sens. Jon Tester and Bob Corker will likely introduce this week that would mandate a two-year postponement of the implementation of the Federal Reserve's proposed rule regulating interchange fees.
In their request to file an amicus brief in the lawsuit, CUNA, NAFCU and several banking and credit card groups said they wanted to explain the adverse effect that the rule would have on the stability of the electronic payment structure that undergirds trillions of dollars of the economy.
CUNA Senior Vice President and Deputy General Counsel Mary Mitchell Dunn said, "We won't be a party to the case, but we will hopefully be listened to because our members will be negatively impacted by the rule."
The Tester-Corker bill would call for a two-year delay and mandate additional study of the ramifications of the rule. The Fed has issued a draft rule, and a final rule must be approved by April 21 and in effect by July 21.
Tester (D-Mont.) and Corker (R-Tenn.) are members of the Senate Banking Committee. They are lining up co-sponsors of the measure, which could be difficult to pass because it would require 60 votes to overcome a likely filibuster by Sen. Richard Durbin (D-Ill.), who wrote the amendment to last year's financial overhaul bill mandating the Federal Reserve rule.
"Sen. Corker doesn't believe the federal government should be telling private companies what they can charge for goods and services. In addition to that, the Durbin amendment was rushed through and not fully thought out, and the result is a piece of legislation that will have numerous unintended consequences. We're working with others to determine the best approach to address this issue," Corker's spokeswoman Laura Herzog said in a statement.
Several sources said Rep. Shelly Moore Capito (R-W.Va.), who chairs the subcommittee that oversees financial institutions and consumer credit, plans to sponsor a companion bill in the House. Her office did not return phone calls seeking comment.
Lobbyists for CUNA and NAFCU declined to assess the prospects for the bills but said they were optimistic that lawmakers will take some action after becoming aware that the proposed rule doesn't protect card issuers, even though Durbin had assured people that it would.
Several key regulators, including Federal Reserve Chairman Ben Bernanke, FDIC Chairman Sheila Bair and NCUA Chairman Debbie Matz have expressed concern about the impact of the proposed rule on small issuers.
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