Bank cards' late fee upheld Supreme Court OKs a flat charge added to usual credit interest

Consumers' suits rejected

Justices say U.S. law overrides states' protection statutes

June 04, 1996|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- The Supreme Court, in a setback for consumers, ruled unanimously yesterday that banks may legally charge a significant flat fee -- in addition to the usual interest -- to customers who fall behind in paying their credit-card accounts.


Banks justify the late fees with the argument that they cover the added expense of monitoring late payments, and say the fees mean that they do not have to shift those costs -- in the form of higher interest rates -- to other customers who pay their bills on time.

"The late fee is a very important price component of credit-card loans," according to the American Bankers Association.

Service fees unaffected

Yesterday's ruling dealt only with extra charges for late payment; it did not involve annual service fees or fees for cash advances.

Two specific fees charged nationwide by Citibank to its credit card customers were at issue in the decision.

One is a flat $15 fee tacked onto a bill anytime the customer makes a minimum monthly payment more than 25 days after the payment is due. The other sets a $6 late fee if the payment comes in more than 15 days after it is due, plus another charge -- either $15 or 0.65 percent of the outstanding debt balance -- if the payment arrives after the next monthly due date.

Maryland and more than 30 other states either set ceilings on lTC late fees or forbid them competely; Maryland limits the amount that may be charged.

Yesterday's decision settled a debate that has been brewing for five years in lower courts. At issue was the power of individual states to ban or at least limit late-payment fees on overdue bank credit-card accounts.

45 lawsuits pending

More than 45 lawsuits pending in courts around the nation

depended on the outcome.

In direct reaction to that series of lawsuits, the U.S. Comptroller of the Currency, the regulator of national banks, issued rules in February that gave national banks permission to charge all of their credit-card customers the fee that is allowed in the bank's own home state.

Yesterday's ruling upheld the comptroller's regulation as a valid rule under an 1873 federal banking law. It made no difference, the court said, that the comptroller waited more than a century to decide that the old law allows late-payment fees on bank cards to be uniform across the country.

The court rejected a California woman's legal challenge to a $15 flat fee for late payment, charged on her Citibank Visa and Master credit cards. The woman, Barbara Smiley of Los Angeles, argued that the fee was illegal under California state law, and that California law should take priority over South Dakota law -- the state law that Citibank relied on in setting its late fee.

Home office in Sioux Falls

Citibank has its home office in Sioux Falls, S.D. -- a location it

apparently chose so it could take advantage of the liberal bank-interest laws there. If Citibank's home state were California, a flat fee of $15 would be considered an excessive penalty on a contract, and would be illegal.

After Smiley sued in California court to block the late fee, Citibank objected, claiming that its right to charge the $15 to all of its late-paying customers was legal under federal banking law. California courts agreed, so Smiley took the issue on to the Supreme Court.

Justice Antonin Scalia, who wrote the ruling in Citibank's favor, said the court had only limited authority to second-guess the comptroller's decision to allow uniform late-payment fees. Scalia said the comptroller acted to "eliminate uncertainty and confusion" about what banks could consider to be "interest" charges that are governed by the banks' home-state laws.

It was a reasonable decision, the court said, for the comptroller to treat late-payment fees as a part of interest.

Pub Date: 6/04/96

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