WASHINGTON — A U.S. District Court judge on Wednesday gave the Federal Reserve Board one week to decide if it will move ahead with making changes to its final rule capping fees on debit card transactions.

U.S. District Judge for the District of Columbia Richard Leon warned attorneys representing the central bank he wanted a clear answer on the Fed's position on issuing an interim final rule and how quickly it could be completed. He also raised the specter of forcing banks and other financial institutions to reimburse excess amounts of swipe fees that have been collected since the interchange rule took effect in October 2011.

"The board is not going to have the luxury of sitting around for weeks," said Leon. "They have to make a decision and move expeditiously. I thought it would be done by now."

Leon invalidated the Fed's final rule in an order late last month, arguing regulators had ignored congressional intent by setting the ceiling for interchange fees too high. The ruling was a blow to the Fed and bankers, who had come to reluctantly accept the cap, but a victory for retailers that had protested the final rule.

"The board has clearly disregarded Congress' 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 July 31 ruling.

A group of retailers — the National Retail Federation, the National Association of Convenience Stores and the Food Marketing Institute — filed their suit against the Fed in November 2011 arguing that the Fed's initial proposal, which would have capped such fees at 12 cents, had complied with the intent of lawmakers. They said the Fed had strayed away from the Durbin amendment's instructions when it allowed banks to charge roughly 24 cents per transaction in its final rule.

The judge's ruling effectively sends regulators back to the drawing board unless they choose to appeal the decision. The Fed has until Sept. 30 to make that determination.

But Leon made clear he had no plans to await the Fed's decision on an appeal. Instead, he said the Fed had one week to decide whether it would make changes to its final rule and issue an interim regulation. The judge set the next hearing for Wednesday, Aug. 21 at 2:00.

"He has made it very clear he wants the Fed to implement the changes he's said are necessary and he's not going to give them more than a brief amount of time to remedy the situation," said Gil Schwartz, a partner at Schwartz & Ballen and a former attorney for the Fed.

The judge said he would not allow this process to drag on for "weeks and weeks and weeks" without "making a decision."

"They've had their briefings. They know the state of play. It's time to make a decision," said Leon, who noted the substantial impact a lapsed decision could have on the U.S. economy, merchants and banks.

"I think the board knows how to act expeditiously," said Leon, chiding the agency.

The judge also asked lawyers from both sides to detail how companies can refund interchange fees that were higher than should have been allowed. He gave them until Sept. 16 to file briefs on that issue.

Katherine Wheatley, associate general counsel for the Fed, tried to assure the judge at the hearing that the board had "no interest in dragging its feet" and that the matter was a high priority.

But she said she could not promise the board would be able to make a decision on making changes to its rule within seven days.

The judge said if the board is unable to make a decision within that time frame, he would lift the stay on his ruling. If that happens, the Fed's rule would be immediately overturned.

Wheatley quickly responded to Leon, saying if the stay was lifted, "then there won't be a rule" — a fact that seemed to do little to dissuade Leon.

The judge also directed Wheatley to bring Scott Alvarez, the Fed's general counsel, to the next status hearing. "Tell him I want him here next week," the judge said, stressing that he expected answers from both Wheatley and Alvarez on the matter.

Observers expect the Fed to punt on issuing an interim final rule, which could wind up being more disruptive for the industry, and instead challenge the court's decision and request a stay from the Court of Appeals.

"For the Fed, there is little-to-no downside to appealing this decision," wrote Isaac Boltansky, a policy analyst at Compass Point Research & Trading, in a note. "Furthermore, we believe it would be surprising if the Fed decided to let such a strongly worded rebuke of its rulemaking authority stand as the final world. It would be wholly inconsistent with the Fed's regulatory persona to not appeal this decision."

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