Federal judge ruled two weeks ago that transaction charges had abused Congress’ intentions.
WASHINGTON – A federal judge lashed out Wednesday at the Federal Reserve for dragging its feet on his order to lower fees that financial institutions are allowed to charge on debit card transactions.
Judge Richard Leon ruled two weeks ago that the Fed inflated so-called “swipe fee” allowances far beyond the limits envisioned by Congress when it passed Wall Street reform laws in 2010. The Fed staff had recommended a fee limit of 12 cents per transaction, but the Fed board raised the amount to 21 cents.
In the days since his ruling, the judge clearly expected the Fed to make the swipe fee case a much higher priority than it did.
“They can come back from wherever they are on vacation” or schedule “a conference call,” a clearly annoyed Leon said after a Fed lawyer told him she could not say how the board felt about lowering fees on an interim basis while working out final details.
“This is a large-scale matter that affects millions of people who lost billions of dollars,” Leon said.
A coalition of trade groups representing retailers, restaurateurs, service station owners and convenience store operators sued after the new limits went into effect Oct. 1. 2011, saying the financial services lobby pressured the Fed into allowing higher fees than the law intended.
Leon agreed in very strongly worded opinion that represented victory for Minnesota-based retail giants Target Corp. and Best Buy, as well as the thousands of smaller state businesses that allow customers to pay with plastic.
He grew stern Wednesday when a Fed lawyer told him she could not speak for board members about interim fee limits or appeal plans and offered no explanation for why the board had not acted on his ruling.
Leon gave the Fed another week to come up with a position on interim fee reductions and a timeline for permanently installing new, lower fees. But he told the associate general counsel representing the government that he expected Scott Alvarez, the Fed’s top lawyer, to be in court to answer questions on Aug. 21.
Leon also criticized Federal Reserve Board members for being “out making speeches” while businesses and consumers faced improperly inflated fees. Board members need to “rule expeditiously,” he said.
The judge also took aim at the general lack of urgency in the federal rule-making process. “We’re not putting a man on the moon here,” he said.
The financial consultancy Keefe, Bruyette & Woods (KBW) issued a report on Tuesday predicting that it would take at least a year and a half for the Fed to come up with a new swipe-fee rule and have the financial services industry implement it. KBW said a Fed appeal of Leon’s ruling would add another three to six months to the process.
Leon was not thinking in those terms. “I want months, not years,” he said in court.
Leon’s impatience stems from the fact that he left the existing fee limits in place temporarily to avoid disruptions in business and to keep financial institutions from returning to pre-reform unlimited fee schedules.
Americans used debit cards in 37.9 billion transactions in 2010, according to a Federal Reserve payment study. While the use of credit cards and personal checks dropped from 2006 to 2009, debit card use increased an average of 14.8 percent per year.
According to experts, swipe fees totaled $16.2 billion in 2009, the year before reform.
The financial services industry waged an expensive lobbying campaign against swipe fee limits. Banks, credit card companies and credit unions have criticized the existing Fed limits as a “multibillion-dollar windfall” to big retailers.
But Leon has asked lawyers from both sides of the case to come up with ways to make financial services companies reimburse businesses for what he calls “overcharges.” That would be the difference between what the Fed’s swipe fee limits have been since Oct. 1, 2011, and what they should have been based on the reform law’s requirement that swipe fees be “reasonable and proportional to the cost incurred by the issuer.”
The amount could be billions of dollars. In court, a lawyer for a coalition of financial services groups told Leon that his clients will fight any such payback.
Banks and other financial companies were not parties in the suit, attorney Seth Waxman said, and there were no requests for damages. “There is no basis in law,” he said, to order reimbursement.
Jim Spencer • 202-383-6123