WASHINGTON – The Federal Reserve Board will appeal a federal judge's decision to force the board to lower the fees financial institutions can charge merchants for debit card transactions.
Fed General Counsel Scott Alvarez told U.S. District Judge Richard Leon on Wednesday that the board would not put in place an interim rule to lower fees and stop what Leon believes are illegal charges by banks and credit card companies while the appeal is ongoing.
Alvarez said an interim rule could hurt the legal standing of the existing rule the Fed made in response to the Wall Street reform law passed in 2010.
The twist was bad news for retailers, convenience store operators, service station owners and restaurateurs who sued the Fed. That coalition of trade groups convinced Leon that the Fed's board members ignored staff recommendations for so-called "swipe fee" limits and put in place limits that were friendly to financial institutions and much higher than the reform law intended. The move raised the staff-recommended limit of 12 cents per transaction to 21 cents.
In a July ruling, Leon ordered the Fed to lower the fee limit, saying the 21-cent rate was "inappropriately inflating" the restrictions Congress wanted. Now, an appeals court could overrule Leon. At the very least, the Fed's appeal extends the process of lowering the fees by a year or more.
"We are very disappointed to see the Fed giving in to the banks," J. Craig Shearman of the National Retail Federation said in a statement after the court hearing. "The Fed has taken a position that will drag this out while retailers and their customers continue to pay billions of dollars in inflated fees that harm the U.S. economy."
Seth Waxman, a lawyer for a collation of financial services trade groups, supported the Fed's appeal and its move to keep existing limits in place.
Without an interim rule that lowers existing limits or a legal ruling that keeps the disputed fee limits in place during appeals, banks, credit card companies and credit unions could once again charge whatever they want for swipe fees, a scenario that Leon has referred to as "the wild wild West."
Debit card fees grew 234 percent from 1998 to 2006 and amounted to a $16.2 billion revenue stream for the financial services industry by 2009, Leon said in his ruling. By 2011, debit card swipe fees averaged 50 cents per transaction.
"Neither the plaintiffs nor the Fed want to go back to an unregulated system," merchants' attorney Shannen Coffin told the judge. Otherwise, Coffin said, his clients the merchants would be "victims of their own success."
The events played out a week after Leon harshly criticized the Fed board members for not treating his ruling more urgently. The judge said he is weighing his ability to force the Fed to write an interim rule to lower fees.
Meanwhile, Leon expressed surprise that merchants' lawyers were willing to ask him to keep in place fees that forced their clients to "pay billions in fees being illegally extracted from them" while the case moved through appeal.
If the current limits are removed, Coffin explained, "merchants don't trust Visa and MasterCard to act with restraint."