TCF National Bank, a subsidiary of TCF Financial Corp., filed a lawsuit challenging the constitutionality of the Durbin Amendment. The suit claims Congress included the amendment without hearings in the Wall Street Reform and Consumer Financial Protection Act of 2010, also referred to as the Dodd-Frank Act.
Under the Durbin Amendment, the Federal Reserve Board has the authority to cap interchange rates on debit card purchases at a "reasonable and proportional" level commensurate with the processing costs incurred by issuing banks. The cap only applies to banks with more than $10 billion in assets. With over $18 billion in total assets, TCF qualifies for the interchange fee cap to be imposed by July 2011, when the regulations are scheduled to take effect.
Wayzata, Minn.-based TCF is the 47th largest commercial bank in the United States and the 12th largest issuer of Visa Inc. debit cards. In 2009, TCF reported over 200 million debit card swipes by 800,000 of the bank's debit card users, representing just over $100 million in debit card interchange revenue.
In the 54-page complaint, filed Oct. 12, 2010, under the U.S. District Court of South Dakota, TCF is seeking a preliminary injunction against the enforcement of the amendment because it "irrationally, prejudicially and illegally interferes with TCF's activities in a market that has been competitive and open by imposing unconstitutional limitations on the ability of TCF and similarly situated banks to recover their costs for providing a service crucial to bank depository customers."
TCF alleges in its complaint that the Durbin Amendment "drastically limits the types and amount of costs that a bank may recover from retailers for debit transactions" and that "a debit card issuing bank will only be able to recover 'incremental' electronic processing costs related to a particular transaction," while all other costs of operating a debit card program, which are the bulk of the actual cost, may not be recovered.
"We believe we will be successful in this lawsuit, in which case we can go back to square one and deal with this thing on an even basis in connection with our competitors," William Cooper, TCF Chairman and Chief Executive Officer, stated in a conference call.
"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."
Payment attorney Paul Rianda agrees. "I think from the bank's perspective it's a smart thing to do to try and minimize the impact of this," Rianda said.
"The way the law is written it almost says look at exactly what it costs to do this transaction, and then that's what you're going to be able to charge, versus looking at all the infrastructure that's in place and the years' worth of development of the infrastructure. It's telling the people who are going to be determining this fee to ignore all of that."
About next steps in the case, TCF Lead Counsel, Timothy Kelly, of Kelly and Berens P.A., said, "The government has a 60-day answer period. We would expect that within the near future that we would file a motion for a preliminary injunction, and we can't tell you when that would be heard. We don't know just yet who the judge is going to be, but my guess is it would be heard sometime in November, and then the court would rule on it in the normal course, probably on an expedited basis."
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