Who would have thought that little plastic debit cards would ignite a national fight over the role of government regulation?
Ever since the Federal Reserve last December proposed slashing debit-card fees charged at the cash register, a pitched battle has broken out among bankers, retailers, consumer groups and constitutional scholars.
Bank executives and their lobbyists have decried the fee limits as "price controls," and have warned that they'll do away with free checking and introduce new fees to make up for the lost income. Retailers, meanwhile, have blanketed the airwaves in the nation's capital with brash TV ads hammering banks for taking bailout money while "looking for another handout." The ad depicts pudgy bankers smoking cigars and rifling through $100 bills.
But this battle may be won in a federal courtroom in South Dakota rather than in the court of public opinion.
At a hearing Monday, lawyers will present their opening arguments in a landmark case that challenges the very foundation of the bank regulatory system. The case will determine whether it's constitutional for Congress and the nation's central bank to impose limits on the fees that banks collect. The fate of a key piece of last year's financial overhaul bill may hang on a single South Dakota judge.
Congress told the Fed to act
At issue is whether banks can continue to collect 40 to 50 cents from merchants every time a consumer uses a debit card to make a purchase in a store. The Dodd-Frank financial overhaul bill that Congress passed last year instructed the Fed to set limits on debit card fees. The Fed proposed capping the fees at 12 cents per transaction, which would wipe away about $12 billion in annual fee income for large banks.
TCF Financial Corp. argued in a federal lawsuit filed last October that the fee limit amounts to an unconstitutional "taking" of its private property and violates the equal protection clause of the U.S. Constitution because it affects only about 60 large banks. Wayzata-based TCF is seeking a court injunction to block the fee limits.
However, industry watchers say a lot more is at stake in the case than just debit card fees. A victory by TCF would embolden banks to challenge key provisions of last year's Dodd-Frank bill, which greatly expanded the government's regulatory authority over banks. Banks are looking to weaken other elements of the act, such as the creation of a new federal agency charged with protecting consumers and restrictions on derivatives trading.
"It's a hugely significant case," said Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, a consumer advocacy group in Washington. "If the banks can prove in court that this bill stinks in one area, they can move on the whole act, and try to argue that the whole thing stinks. It's a way to reopen the law."
The legal skirmish has created some strange bedfellows. The Credit Union National Association, a Washington trade group that normally relishes the opportunity to bash banks, has signed on to a friend-of-the-court brief supporting TCF's arguments. And 21 state banking associations, led by the Minnesota State Banking Association, have joined in filing a brief in favor of TCF, though most of their members are exempt from the fee limits because they are too small.
Even civil rights groups have weighed in. Early this month, the NAACP, the nation's oldest civil rights group, warned that new fee limits, though "well-intentioned," could create further obstacles for people to access banking services if free checking disappears. The group urged Congress to delay implementation pending further study.
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