by Samuel Zun
Earlier today, the industry effort to delay implementation of the Durbin Amendment fell six votes short of the 60 needed to clear an important hurdle in the Senate. The amendment offered by Senator Jon Tester (D-MT) would have required a group of “study agencies” [1] to spend six months examining the impact of the Board’s proposed regulation of debit interchange rates. [2] The failure of the amendment to attract 60 votes in the Senate almost certainly dooms legislative efforts to delay implementation of the pending regulation.
The failure prompts an obvious but not easily answered question—so what now? Although it is tempting to say that the failure of the Tester Amendment takes the industry back to the drawing board, that temptation must be resisted. The so-called Durbin Amendment is the law of the land. It directs the Board of the Federal Reserve to issue regulations establishing standards for whether the amount of any interchange transaction fee is “reasonable and proportional … to the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction.” [3] Those regulations are, according to the statutory text, set to go into effect on July 21, 2011.
This begs another question—what are those regulations? To quote David Mamet, “at this point, we don’t know.” In December of last year, the Federal Reserve issued proposed rules, not final rules. Although the final rules have been expected for several months, the Board, at the apparent direction of Chairman Bernanke, had embargoed the release of the final rules while Senator Tester worked on his proposed legislation. The earlier rules, as has been observed previously, left a number of important questions unanswered: what is the standard by which debit interchange will be set (the original draft offered two possible standards); and to what degree can the applicable standard be modified to accommodate efforts to reduce fraud (the earlier standard did not offer a proposal on the so-called fraud adjustment). The regulations also attracted legions of comments, criticizing virtually every aspect of the proposed rule from the definition of debit card as well as to the Board’s seeming failure to abide by its own rules in issuing the rules. The Board’s final rule must respond to those comments and may even change in some respects.
Even assuming the existence of a final set of rules simply raises another question—what then? The lawyer’s answer to that question is frequently and, in this case, appropriately, “Take ’em to Court.” For purposes of this rule-making procedure, the Board is a federal agency, and as a federal agency, it is supposed to follow the Administrative Procedures Act when issuing rules. Parties affected by final rules issued by a federal agency can bring a challenge under the Administrative Procedure Act arguing, among other things, that the final rule violates the statutory mandate and/or is arbitrary and capricious. Although supporters of the effort to cap debit interchange rates are likely to dismiss the prospect of such cases as hopeless, the final rules could be open to challenge, particularly if they retain certain aspects of the proposed rules. As has been recounted at length elsewhere, the Board’s proposal to cap interchange rates does not seem to meet any definition of the word “standard,” and the Board has flatly admitted that many issuers will not recover their incremental costs of processing debit transactions under either of its proposed implementations of the debit rate cap. The Board’s interpretation of the routing and exclusivity provisions, which, ironically, the Tester Amendment was apparently not intended to impact, is also difficult to reconcile with the text of the statutory language. Financial institutions affected by the final rules can also marshal Constitutional challenges to those rules.
In short, the failure of the Senate to muster 60 votes in support of Senator Tester’s amendment means both a lot and a little. It removes one degree of uncertainty from the process, and it clearly shifts attention to the Board of the Federal Reserve. What happens after that, however, is anybody’s guess, though—one hopes—a slightly more educated one.
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Samuel Zun is an associate in the San Francisco office of O’Melveny & Myers LLP and a member of the Litigation Department.
[1] Section 6 of the amendment defines “study agencies” as the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration. 157 Cong. Rec. S3558 (daily ed. June 7, 2011).
[2] Debit Card Interchange Fees and Routing, 75 Fed. Reg. 81722 (Dec. 28, 2010).
[3] 15 U.S.C. § 1693o-2(a)(4)(B)(i).
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