Today, U.S. District Judge Richard Leon ruled that the Federal Reserve's implementation of the Durbin Amendment of the Dodd-Frank financial overhaul, which sets price controls on what banks and credit unions can charge retailers to process debit card purchases, was not draconian enough. Though I am no fan of either Dodd-Frank or the Durbin Amendment, this is a severely flawed reading of the law based on a false definition of "legislative intent."
Should the Fed adopt Leon's interpretation, it will almost certainly result in more bank and credit union fees for consumers. The Fed would also open itself up to even more litigation on the price controls, including constitutional issues involving the property right to seek a return on capital invested guaranteed by Due Process and Takings clauses of the 5th Amendment.
In 2011, the Fed set price caps on debit card interchange fees at 21-26 cents per transaction. Although this was higher than the 7-12 cents the Fed had initially proposed in late 2010, and let banks and credit unions cover somewhat more of the costs of the debit card network infrastructure, it still slashed average fees to retailers by more than half and did not allow any profit to be made on the retailer side of the transaction. So finanical institutions made up this loss, as free-market scholars predicted they would, by shifting costs to debit card consumers.
In 2009, the year before Dodd-Frank and its Durbin Amendment became law, 76 percent of banks offered free checking with no minimum balance. According to a survey by Bankrate.com, by 2011 just 45 percent offered this service, and this figure dropped to 39 percent in 2012. Bankrate fingered the Durbin price controls as a big factor, pointing to “new rules capping the cost of debit card swipe fees for U.S. retailers.”
Yet in his ruling in a case brought by retailers getting billions in savings from these price controls -- but who want billions more -- Leon ruled that these price caps are too high, and that the Fed should have set them at its initial proposed rate that was even more draconian. He asserts mistakenly that this is all the law allows for.
"An agency's interpretation must be rejected if it is inconsistent with clearly expressed legislative intent," Leon writes. "It is not about whether the rule favors merchants or issuers; rather, it is about whether the rule implements Congress's will."
Yet in measuring "legislative intent" and "Congress's will," Leon only cites the view of one member of Congress who voted for the legislation: Sen. Dick Durbin (D-Ill.), who bragged that he was sponsoring the amendment at the behest of retailers like Walgreens.
But "legislative intent," as the Competitive Enterprise Institute and other groups explained in comments to the Fed when it was formulating the rule in 2011, " means the intent of all members who voted for Dodd-Frank, not just the sponsor or supporters of the Durbin Amendment." Although Durbin sponsored the amendment, he was but one of hundreds of members of the House and Senate who voted for the final Dodd-Frank legislation containing it, many of whom vehemently opposed this particular provision.
For intance, after the Senate passed the amendment, more than 70 House Democrats signed a letter arguing for the removal of the Durbin Amendment from the House-Senate conference bill. Former House Financial Services Committee Chairman Barney Frank (D-Mass.), namesake of half of the law, blasted the provision. Yet when it was not removed, most of these Democrats voted for the final bill, despite their misgivings about the amendment.
Their "intent" should count as much as Dick Durbin's. As CEI stated in its 2011 comments, "It is difficult to argue that these members' intent´ is reflected by a Fed rule that goes even further than the statute calls for in shifting costs from retailers to consumers."
The language of the Durbin Amendment is ambiguous, but to a great extent this ambiguity expresses Congress' will. If the strongest proponents and beneficiaries of this measure hadsubmitted language making explicit their desire for such wholesale cost-shifting retailers to consumers, the Senate would likely not have approved the amendment, or it likely would have been stripped from the conference report.
Contrary to the Leon's ruling, it was a perfectly reasonable interpretation for the Fed to include costs in setting the price controls that the text of the Durbin Amendment didn't explicitly mention. In fact, we argued for the Fed to go further in this regard than it did.
In interpreting the statute's command that interchange fees be "reasonable and proportional to the cost incurred by the issuer with respect to the transaction," we argued that "'reasonable´ should mean covering costs, plus a rate of return. All cost of a 'particular transaction´ should be considered, including fixed costs."
We also pointed out that both the Fed's intital proposal and the Durbin Amendment itself raised serious constitutional questions. At the time, TCF Bank of Minneapolis was suing the Fed, with noted property rights scholar Richard Epstein as its attorney, arguing that the Durbin Amendment violated the Supreme Court precedent set in Duquesne Light v. Barasch, 488 U.S. 289 (1989), that a government-set "rate is too low if it is so unjust as to destroy the value of the property for all the purposes for which it was acquired." TCF Bank dropped the case when the Fed set less draconian controls in its final rule, but this doesn't mean they pass constitutional muster.
So it is a good time for the Fed, Congress, and the courts to review the Durbin Amendment, but not in the way the Leon and the retailers want it done. The price controls should instead be reviewed for loosening, less cost-shifting to consumers, and ultimately repeal!