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Interchange rule struck down by U.S. District Court

Mon, Aug 5, 2013

Washington, District Of Columbia

On July 31, Judge Richard Leon of the U.S. District Court for the District of Columbia issued an opinion that strikes down the Federal Reserve’s debit interchange rules.  Judge Leon, a George W. Bush appointee who joined the D.C. District in February 2002, wrote a scathing opinion that chastises the Federal Reserve for, in his opinion, failing to craft rules that follow both the actual language and Congressional intent of the Durbin Amendment.

Judge Leon vacated the interchange rule and has ordered the Federal Reserve to craft an entirely new rule.  It is expected that the Federal Reserve will appeal the ruling and seek a stay pending the appeal.  Therefore, it is unlikely that the interchange rule will change in the near future.  Should Judge Leon’s ruling be upheld through the appeals process or the Federal Reserve choose to not appeal the ruling, it is likely that the interchange rate will be reworked to more closely resemble the $0.07 to $0.12 rate that was originally proposed by the Federal Reserve.  While institutions with less than $10 billion in assets are not subject to the interchange rule, any changes to interchange rates for larger institutions will likely have an impact on all institutions.

Judge Leon’s ruling stated that method by which the interchange fee is calculated runs afoul of the Congress’s mandate because it incorporates aspects that do not “relate to a ‘particular’ or single electronic debit transaction.”  The ruling flatly rejects the Federal Reserve’s assertion that there are costs that were neither allowed or disallowed to be considered when calculating the interchange rate allowable under the Durbin Amendment.  The costs that the Federal Reserve asserted were not addressed by the language of the Durbin Amendment included network connectivity & software, hardware, equipment, network processing fees, transaction monitoring, and fraud losses.  According to Judge Leon’s ruling, the Federal Reserve acted outside of the scope of Congress’s mandate in using these costs as part of its calculation of the interchange fee.

Furthermore, Judge Leon’s decision also struck down the network non-exclusivity portion of the interchange rule.  His decision states that the Federal Reserve’s rule did not properly implement the Durbin Amendment’s requirement that merchants be able to route cards on at least 2 unaffiliated networks.  Judge Leon’s decision says that by only requiring cards to be routed on at least 1 PIN and 1 signature network the Federal Reserve ignored the non-exclusivity portion of the Durbin Amendment.

MDDCCUA will be continually monitoring the legal proceedings regarding the interchange rule, and will inform you of any developments.  In the meantime, should you have any questions regarding this ruling, please contact Ricardo Pineres (