Fed appeals rejection of rule on regulating debit-card fees
WASHINGTON — A fierce legal battle that pits financial firms against the retail industry took a new turn Wednesday when the Federal Reserve said it would appeal a recent decision involving debit-card transaction fees.
Judge Richard J. Leon of the U.S. District Court for the District of Columbia shocked banks and companies such as Visa and MasterCard in July when he struck down a Fed regulation that governs how much retailers must pay to lenders and other companies when customers swipe their debit cards. The retailers applauded the decision because it could force the Fed, a major banking regulator, to rewrite the rule in such a way that they would pay far less to the banks in debit-card fees. Lower fees, in theory, could indirectly benefit consumers, although retailers have no obligation to pass along the savings on debit-card fees to customers.
But at a hearing in the court Wednesday, the Fed’s top lawyer, Scott G. Alvarez, told the judge the central bank would appeal his decision.
The Fed’s move raises a raft of important issues five years after the financial crisis of 2008.
The appeal will be a crucial test of the courts’ power to overturn the financial regulations that stemmed from the sweeping banking overhaul after the crisis. In most instances, the courts have sought to change the new rules in ways that favor banks. But in this case, Leon’s decision could diminish a lucrative revenue stream for banks and others. The Fed’s appeal could also stoke criticism that the central bank is overly generous to the banking industry.
The case stems from the Dodd-Frank Act, which Congress passed in 2010 to overhaul the financial industry. The act contained a section whose intent was to cap the fees retailers pay when customers use debit cards. The Fed was given the task of writing specific regulations based on language in the act.
But in his July 31 opinion, which threw out the Fed’s debit-card rule, Leon said the Fed had seen ambiguity in Dodd-Frank where none existed. When setting the fee cap, the Fed made an interpretation of Dodd-Frank that was ‘irreconcilable with the statute,’ he wrote.
The judge has suspended his decision to throw out the Fed’s rule while the parties involved decide what do next.
On Wednesday, Leon suggested that one option for him was to direct the Fed to write a replacement, or interim, rule to satisfy his objections while the appeal continues.