TCF has lost the latest round in its battle against the new federal law limiting swipe fees.

A U.S. appeals court in South Dakota on Wednesday rejected TCF Financial Corp.'s effort to block the law with an injunction. The bank was arguing the new law, the so-called Durbin amendment passed last year as part of the Wall Street Reform Act, was unconstitutional.

The nine-page decision in TCF vs. Ben S. Bernanke came out hours before the Federal Reserve Board announced it is capping the fees large banks can charge merchants for debit card transactions at 21 cents per customer swipe -- higher than the 12-cent cap it originally proposed, but much lower than the current industry average of about 44 cents.

Wayzata-based TCF filed suit in October in South Dakota claiming the proposed 12-cent cap would cause "massive dislocation" for the bank, forcing it to offer debit card services to its checking account customers below its own costs. TCF has until now received an average fee of about 48 cents per transaction, according to court records.

Officials at Wayzata-based TCF did not respond to repeated requests for comment.

The Clearing House, which represents banks, issued a statement saying it "continues to believe that the Durbin Amendment presents serious constitutional questions, and is hopeful that those issues can be fully developed and considered when the TCF case returns to the district court for full consideration of the merits of TCF's challenge."

Ed Mierzwinski, a lead consumer advocate with the Public Interest Research Group, called TCF's filing "a really stupid lawsuit filed by an arrogant bank."

"It would be very difficult for TCF to overcome a federal agency on something Congress told them to do," Mierzwinski said.

TCF argued that the proposed cap amounted to an unconstitutional taking of property and violated the equal-protection clause of the Fifth Amendment to the Constitution by giving an advantage to smaller banks. The law only applies to banks with more than $10 billion in assets.

U.S. District Judge Lawrence Piersol in Sioux Falls denied the bank's request for a preliminary injunction, ruling the suit was unlikely to succeed, and the bank appealed.

A three-judge panel of the appellate court unanimously agreed Wednesday.

Judge Michael Melloy of Cedar Rapids, Iowa, wrote that "the Durbin amendment only restricts how much certain financial institutions issuing a debit card may charge for processing a transaction; it does not restrict how much those institutions may charge their customers for the privilege of using their debit card services."

Nothing bars TCF from recouping its costs by assessing customer fees, the court said.

The Fed has tried to have TCF's lawsuit dismissed, arguing that the bank's claims of irreparable harm from the proposed fee cap are "highly speculative" and do not compare to the harm that retailers and consumers would face if the current debit card fees remained in place.

When Congress debated the financial reform bill last summer, large retailers lobbied aggressively to limit interchange fees. Retailers such as Wal-Mart argued that a reduction in the fees would enable them to cut prices for shoppers.

TCF has more at stake from the new fee limits than many other banks, because a large percentage of its revenue comes from checking account customers with debit cards. Debit card interchange fees account for about 23 percent of TCF's non-interest income, compared with 7 percent at a typical Midwest bank, according to a recent report by investment firm Stifel Nicolaus.

Jennifer Bjorhus • 612-673-4683 • Dan Browning • 612-673-4493 •