CUNA Brief: Fed interchange rule bad, court ruling worse

The Federal Reserve Board (Fed) has made errors in implementing the Dodd-Frank-imposed debit interchange fee cap, the Credit Union National Association (CUNA) said in a legal brief, but a July 31 court ruling overturning the rule would make things "significantly worse."

The ruling "compounds the (Fed's) legal error through a construction that would require deep cuts--amounting to many billions of dollars each year--into issuers' remaining interchange-fee revenues," CUNA, with its financial services coalition partners, warned in an amicus brief.

"Already the Fed cap is too low and the court has further misinterpreted the law to set the fee cap equal to only a portion of the cost incurred by the debit card issuer with regard to the transaction," CUNA said.

"(T)he statute states clearly that the full 'cost' incurred by an issuer 'with respect to' an electronic debit transaction may be recovered through an interchange fee," CUNA noted.

Judge Richard Leon of the U.S. District Court for the District of Columbia issued the July decision to strike down the Fed's price caps on debit interchange fees. He ruled at that time that the Fed did not follow narrow congressional intent when it implemented the cap and other changes imposed by what is known as the Durbin amendment.

At the urging of both sides party to the lawsuit--the merchants' group plaintiffs and defendant Fed--as well as CUNA and its partners, Leon issued a stay in September to keep the Fed rules in place during the court proceedings.

The CUNA brief Monday (Oct. 21) made two additional points against the court's ruling. CUNA said the court ignored that the statute provides that the interchange fee "shall be reasonable and proportional to that transaction cost."

"In choosing that language, Congress invoked the established constitutional principle that price regulation may not deprive one of the right to earn a reasonable return.  The district court's construction, which would call for deeply below-cost price caps, would flagrantly violate that principle," the CUNA brief stated.

The court and Fed also depart from congressional intent in their interpretations of the network non-exclusivity clause. CUNA wrote that while the Fed final rule departs from intent by requiring issuers to negotiate contracts with unaffiliated networks so as to "enable multiple networks on a debit card," the court's interpretation departs further.

The court's interpretation that issuers must enable additional networks on their debit cards would force issuers to spend billions of dollars developing complex technology that did not, and does not yet, exist. CUNA argued that is "implausible" to believe it was the intent of Congress, especially where those expenditures are not recoverable under the district court's construction of the statute.

CUNA made a final point that the district court's ruling would cause grave harm to all debit system participants through reduced services, diminished investment in innovation by issuers, increased fees to consumers, and disruptive technological changes--all with no tangible offsetting economic benefit.

Merchants have until November 20 to respond and then the Fed has a December 4 deadline to reply to that.

CUNA's partners in filing the brief are the American Bankers Association, Consumer Bankers Association, Electronic Payments Coalition, Financial Services Roundtable, Independent Community Bankers of America, Midsize Bank Coalition of America, National Association of Federal Credit Unions, and National Bankers Association. The case is known as NACS, et al. v. Board of Governors of the Federal Reserve System.

Please click here to read CUNA's full brief.