WASHINGTON (Reuters) - A U.S. judge ruled on Wednesday that the Federal Reserve ignored the intent of Congress regarding a controversial cap on debit card "swipe fees" that are part of a dispute between banks and retailers.
The 2010 Dodd-Frank law called for the Fed to cap such fees, which banks charge to retailers when their customers use debit cards to make purchases.
Judge Richard Leon of the U.S. District Court for the District of Columbia sided with retailers, who argued the Fed's 21 cent cap was higher than Congress intended.
"The Board has clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction," Leon wrote in his ruling.
The so-called Durbin amendment to Dodd-Frank, named for its sponsor, Democratic Senator Richard Durbin of Illinois, was intended to reduce burdens on retailers and hopefully trickle down to consumers in the form of lower prices.
The amendment called on the Fed to consider certain costs to banks of providing debit cards when it set the fee cap. It was praised by retailers, but aggravated banks, which said they might have to charge consumers extra for debit cards to make up for the lost revenue.
But when the Fed announced its cap, which was higher than the regulator initially proposed, retail groups protested that it let banks charge higher fees than the law intended.
The National Retail Federation and other groups said the Fed inappropriately bowed to pressure from financial industry lobbyists and looked at bank costs beyond those the Durbin amendment directed it to consider.
The retail group on Wednesday applauded the judge's decision to throw out the Fed's rule.
"From the very beginning, retailers and restaurants knew the Federal Reserve Board of Governors had grossly misapplied the swipe fee law," Mallory Duncan, general counsel at the National Retail Federation, said in a statement after the ruling.
"They failed to heed Congress' call to set fee standards that were 'reasonable' and 'proportional' to the actual cost of a transaction," Duncan said.
The head of a banking group warned of "even more chaos ahead for consumers and small banks."
"Congress ought to save families from this uncertainty by repealing this government mandated price-fixing," Richard Hunt, president of the Consumer Bankers' Association, said in a statement.
A spokeswoman for the Fed declined to immediately comment on the ruling.
(Reporting by Emily Stephenson. Editing by Andre Grenon)