Court of appeals says banks are allowed to charge whatever they want
Santa Monica is losing its battle with the banking industry.
A federal appeals court on Friday upheld an earlier decision that Santa Monica doesn’t have authority to ban ATM fees.
A panel of three judges on the 9th U.S. Circuit Court of Appeals overturned laws in Santa Monica and San Francisco that ban certain ATM fees charged by banks. The court of appeals, in upholding an ear-lier judge’s ruling, said only the federal government, not city councils or local voters, may create such regulations.
The San Francisco-based appeals court ruled that federal banking regulations adopted by Congress allow banks to charge fees for ATM usage. That being the case, the Santa Monica City Council and San Francisco voters had no authority to approve identical laws in 1999 banning a bank from charging an ATM fee to a customer not a member of that bank.
“We find that the ordinances are pre-empted by federal law and regulations and thus invalid,” Judge Joseph T. Sneed wrote in his ruling.
Santa Monica was the first city in California to take on the banking industry by banning what officials — and many consumers — regard as a “double charge.”
City Councilman Kevin McKeown, who is running for re-election, brought the issue to the forefront in October 1999 after he realized he was charged twice when he used ATM machines in San Francisco’s Chinatown. It irked him enough to bring the issue to the city council, where the ban passed 4-3. The council indicated that banks who allow customers to be charged twice are ripping them off.
City officials and consumer advocates explain it this way: Customers who use an ATM machine at a bank other than their own pay not only a $1.50 fee, but $2 more tacked on by their own bank. Then there’s a third fee that rarely is discussed publicly that’s called an “interchange fee.” That’s a fee customers don’t see because the banks privately charge each other for their customer’s withdrawals.
Adam Radinsky, Santa Monica deputy city attorney, said federal banking regulations do allow local governments or city voters to adopt such rules. He said Arkansas, Mississippi and Wyoming have rules limiting the amount of ATM fees banks may levee.
The two cities also argued that California consumer protection laws allow such ordinances.
“The ATM surcharge is an outrageous and duplicative fee that is unfair to consumers,” Radinsky said. “We’re disappointed with the court’s decision because it appears the court failed to address the opinions of cases in other cities.”
Radinsky wouldn’t go into specifics in the case because it’s still pending, he said. It’s unclear whether the Santa Monica City Council will petition the full 9th Circuit of Appeals to review the case before taking it to the Supreme Court.
“Obviously the City Council hasn’t had time to decide its next move,” Radinsky said.
Santa Monica may have to pay attorney fees for the banks if it loses the case in the higher court. It’s unknown exactly how much money has been spent in staff time to argue the city’s case, but at least one City Council member believes enough is enough. Councilman Herb Katz said he could have predicted the court’s decision.
“I’m not surprised at all. It shows you our city has wasted so much time and money on something that shouldn’t have come up in the first place,” he said. “If you don’t want ATM fees then don’t use them. It’s that simple. But you don’t have one small city take on the universal banking system.
“I’m not surprised at all. It shows you our city has wasted so much time and money on something that shouldn’t have come up in the first place.” — – HERB KATZ City Councilman
“This was Kevin McKeown’s project and this is what he has done with our money in this bleak economic environment we’re in,” Katz continued. “He doesn’t care that what he’s doing is spending taxpayer’s money, which is being completely wasted. This is irresponsible — the whole thing was. I don’t like being charged ATM fees. But I’m not suing the banks... As a city, we’ve got to quit meddling in private enterprise.”
McKeown was unavailable for comment on Friday.
Leland Chan, a lawyer for the California Bankers Association that challenged the rules, said the court made the right decision. He called the rules contrary to free-market capitalism.
“Can you imagine voters telling Intel how much to charge for its chips?” he asked.
The 3-0 decision upholds U.S. District Judge Vaughn Walker, the San Francisco federal judge who blocked the ordinances from being enforced at the request of Bank of America, Wells Fargo Bank and others. In July 2000, Walker ruled that any local ordinances restricting automated teller machine surcharges violate both the National Banking Act and the Home Owners Loan Act, which govern nationally chartered banks and federal savings banks.
In essence, Walker said those congressional acts precluded local entities from enacting such legislation, a decision the appeals court affirmed Friday.
But Radinsky has argued that Walker’s interpretation of the law is wrong. The National Banking Act actually leaves open cities’ ability to regulate bank fees, he contends.
“The United States Congress has repeatedly spoke on this issue and emphasizes the right for cities to pass consumer protection laws like this,” Radinsky told the Daily Press in January. “The district court got it wrong and we are confident that the law is on our side.”
The law doesn’t challenge fees a bank charges its own customers to use a different bank’s ATM. Those fees range around $2.
It became clear during oral arguments in January that the court ultimately would rule as it did Friday. At the time, the judges appeared unmoved by city lawyers defending the ordinances.
“What’s the constitutional problem to charge what you want?” Judge Sneed asked.
Judge Stephen Trott added: “You’re prohibiting what federal law allows.”
Banks in Santa Monica were forced to drop the extra fees for a couple of weeks directly after the ban went into effect in 1999. Later, Wells Fargo and Bank of America — the state’s two largest banks — filed the suit in San Francisco.
The original hearing convinced a judge to make the banks put ATM fees collected into escrow for possible return to customers. As a result, banks were ordered to put all the fees into that escrow account until the issue is decided in court. That account has grown to well over $1 million.
Banks say they need the surcharges to expand their ATM networks. Consumer organizations backing the bans say the fees merely pad bank profits. (The Associated Press contributed to this report.)
Originally published in the Santa Monica Daily Press print edition on October 26, 2002. Read the original PDF.