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Banking and Finance

Sutherland Alert: Lawsuit Challenges Constitutionality of Debit Card Interchange Provisions of Dodd-Frank Act

by Robert J. Pile and Heather J. Howdeshell

TCF National Bank (TCF) has filed a suit in the United States District Court in South Dakota challenging the constitutionality of Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as the Durbin Amendment). The Durbin Amendment authorizes the Federal Reserve to implement regulations governing payment card transactions in the areas of (1) debit interchange fees, (2) payment card minimum and maximum purchase prohibitions, and (3) debit payment network exclusivity.

TCF's lawsuit challenges the constitutionality of the debit interchange fee regulation on three grounds: (1) that by limiting fees to below the actual cost to produce the services, the government is taking property without just compensation; (2) violation of due process related to Congressional approval of the Durbin Amendment and the absence of public hearings; and (3) violation of equal protection, because the Durbin Amendment expressly applies only to issuers with $10 billion or more in assets, thus leaving unaffected (and potentially advantaged) approximately 99% of U.S. banks.

The Durbin Amendment provides that interchange rates for electronic debit transactions must be "reasonable and proportionate" to the actual processing costs incurred by the issuer, taking into account only the incremental costs of authorizing, clearing and settling electronic debit transactions, but not other costs incurred by an issuer which are not specific to a particular debit transaction. Under the Durbin Amendment, the Board of Governors of the Federal Reserve is tasked with drafting regulations designed to implement the reasonableness and proportionality requirements for debit transaction interchange fees by April 21, 2011. The debit transaction interchange regulations implemented by the Federal Reserve will not apply to card issuers with assets of less than $10 billion.

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