Dodd-Frank Ruling Goes Wrong Way

Washington, D.C., July 31, 2013 – Today, U.S. District Judge Richard Leon struck down debit card price controls in the Dodd-Frank financial overhaul as not draconian enough. He ruled the 21- to 26-cent fees the Federal Reserve established for banks to charge retailers were too high and implied 7-12 cents would be required under Dodd-Frank’s Durbin Amendment.

In the post below from the Competitive Enterprise Institute’s, John Berlau, CEI senior fellow for finance and access to capital, explains why the judge’s ruling was flawed and could result in even higher bank and credit union fees for consumers. Berlau concludes: “It is always a good time for the Fed, Congress, and the courts to review the Durbin Amendment, but not in the way Leon and the retailers want it done. The price controls should instead be reviewed for loosening, less cost-shifting from retailers to consumers, and ultimately repeal.”

by John Berlau on July 31, 2013

Today, U.S. District Judge Richard Leon ruled the Federal Reserve’s implementation of the Durbin Amendment of the Dodd-Frank financial overhaul, which sets controls on what banks and credit unions can charge retailers to process debit card purchases, was not draconian enough. Neither Dodd-Frank nor the Durbin amendment are good for the country, but this ruling represents a severely flawed reading of the law based on a false definition of “legislative intent.”

Should the Fed adopt Leon’s interpretation, it almost certainly will result in more bank and credit union fees for consumers. The Fed also would 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 the Due Process and Takings clauses of the Fifth 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 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 financial 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, this figure had dropped to 45 perent by 2011 and to 39 percent by 2012. Bankrate identified 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 these price caps are too high and the Fed should have set them at its initial proposed rate, which was even more draconian. He asserts mistakenly this is all the law allows.

“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’ will.”

Yet in measuring “legislative intent” and “Congress’ will,” Leon cites only 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 such as 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, many of whom vehemently opposed this particular provision.