Interchange Brief Argues Fed Rule is Bad, Court Ruling is Worse

Posted by Marissa Anema Tuesday, October 22, 2013 11:59:00 AM

WASHINGTON – The Federal Reserve Board has made errors in implementing the Dodd-Frank-imposed debit interchange fee cap, CUNA said Monday 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.

"The 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.

A U.S. District Court judge issued the July decision to strike down the Fed's price caps on debit interchange fees at that time ruling 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 parties to the lawsuit as well as CUNA and its partners, the judge issued a stay in September to keep the Fed rules in place during the court proceedings.

The CUNA brief 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 Fed's brief in support of its appeal was also due Monday. (See related story.) Merchants have until November 20 to respond and then the Fed has a December 4 deadline to reply to that.

The full brief is available here.

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