TCF vs. Fed: Suit Stands, Injunction Request Denied

TCF Financial Corporation's lawsuit against the Federal Reserve board wasn't thrown out as the Fed had requested-but the company was dealt a blow when a federal judge refused to issue a preliminary injunction to stop debit-card interchange limits from being enforced.

A federal judge opted not to throw out a lawsuit filed by TCF Financial Corporation that challenges limits placed on fees that banks can collect for debit-card transactions.

But that same judge-District Judge Lawrence L. Piersol in Sioux Falls, South Dakota-also denied TCF's request for a preliminary injunction to stop the limits from being enforced and allowed the case to move forward while Congress debates the issue. The limits are for fees that merchants pass along to banks in exchange for being able to accept debit-card payments. They constitute the Durbin amendment-a portion of the Wall Street financial reform act, or the Dodd-Frank Act, which was passed by Congress in July 2010.

Wayzata-based TCF sued six members of the Federal Reserve's board in October, arguing that the Durbin amendment would cause it to lose significant revenue and is unconstitutional. The interchange fee limits only apply to banks that have $10 billion or more in assets, which puts larger banks at a disadvantage, TCF contends.

“We're going to lose $6 million per month,” TCF National Bank lawyer Timothy D. Kelly told Piersol on Monday, according to media reports. “We can't recover it from the government, and we can't recover it from the retailers.”

In previously filed legal briefs, TCF said that it began distributing Visa debit cards to its checking account customers in 1995. Today, more than 800,000 customers use TCF-branded Visa debit cards each month-and more than 1.5 million customers have the company's Visa debit cards.

Between August 1, 2009 and July 30, 2010, TCF generated interchange revenue of just over $100 million. TCF said that incremental costs directly related to debit cards during that time was just under $52 million-and it would have only recovered $22.7 million in under the new rules proposed by the Federal Reserve.

In its request for TCF's suit to be thrown out, the Fed argued that it lacks merit because Congress has the authority to regulate banks. The Fed also said that the request is premature because the rules being opposed don't take effect until July 21 and the court can't determine yet whether TCF will receive a “constitutionally permissible” rate of return.

A Justice Department lawyer reportedly told the judge that banks don't have “a fundamental right” to debit-card interchange fees and that regulating them is a move that's intended to protect both merchants and consumers.

Federal Reserve Chairman Ben Bernanke previously told a Congressional committee that the number of U.S. debit-card transactions has jumped from 8 billion in 2000 to 38 billion in 2009. Debit-card interchange fees exceeded $16 billion in 2009, according to the Fed.

The Fed hasn't yet settled on a specific interchange fee cap, and Bernanke said last month that it will miss its April 21 deadline for issuing the regulations. But in December, the Fed proposed capping debit-card interchange fees at 12 cents per transaction; the current formula averages 1.14 percent of the purchase price, or 44 cents.

Piersol has asked attorneys for both sides to submit proposed orders to him. TCF Chairman and CEO William A. Cooper was reportedly optimistic when Piersol said that applying the Durbin Amendment only to banks that have more than $10 billion in assets “gives the court some pause” because it may violate the U.S. Constitution's requirement of equal protection under the law.

Cooper told Bloomberg after Monday's court proceedings: “I think everybody is uncertain as to what this all means. [The judge] seemed to be very encouraging on the issue of equal protection.”

With approximately $18.5 billion in total assets, TCF Financial Corporation-which operates subsidiary TCF National Bank-is Minnesota's second-largest bank holding company. It has 442 branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona, and South Dakota.