High court upholds MBNA credit card practice

Banks can charge interest on fees imposed on users

April 22, 2004|By BLOOMBERG NEWS

WASHINGTON - MBNA Corp. won a U.S. Supreme Court decision yesterday that lets companies continue to charge interest on fees customers must pay when they exceed their credit limits.

Credit card companies can impose the fee separately from finance costs, the justices said in unanimously affirming a Federal Reserve Board rule. The court rejected a customer's claim that MBNA, the world's second-largest credit card issuer, should be barred from listing the fee as a separate purchase that accrues interest charges.

At issue was the 1968 federal Truth in Lending Act, which requires lenders to disclose credit terms, including finance charges and the annual percentage rate. The law doesn't spell out whether over-limit charges must be included in the finance charge. Since 1981, the Federal Reserve has had a rule allowing such fees to be charged separately from finance costs.

The Federal Reserve rule "always specifically excluded over-limit fees" from finance charges, MBNA spokesman Jim Donahue said in an interview yesterday. "The Supreme Court has ruled that the Fed's guidelines are appropriate, and we're obviously gratified by that decision."

Donahue said over-limit fees "will be included in the outstanding balance, and so interest will be charged on that fee." He said he didn't have a figure for the amount of interest involved.

The American Bankers Association, MasterCard International Inc. and Visa USA Inc. supported MBNA in a court brief, saying companies relied on the Federal Reserve rule in disclosing fees. Visa and MasterCard are the two largest credit-card networks. Instead of issuing cards, the companies operate networks that process payments made through cards issued by member banks.

"They allowed her to go over her credit limit," said Sylvia Goldsmith, attorney for customer Sharon Pfennig, who was an Ohio State University student at the time. "In the course of two years, she went $700 in debt" on accumulated over-limit fees and interest charges, Goldsmith said.

"They authorize the extension of credit," said Goldsmith of the Murray & Murray firm in Sandusky, Ohio. "They charge her interest. Then they charge her the penalty, $29, then they charge her interest on the penalty."

The Bush administration supported Wilmington, Del.-based MBNA, saying a lower court that ruled in Pfennig's favor should have deferred to the Federal Reserve's interpretation of the truth-in-lending law.

"It is perfectly reasonable to characterize an over-limit fee not as a charge imposed for obtaining an extension of credit over a consumer's credit limit, but rather as a penalty for violating the credit agreement," Justice Clarence Thomas wrote for the court.

Pfennig sued Household Credit Services Inc. and MBNA, which bought Household's credit-card portfolio in 1998. Household is a unit of London-based HSBC Holdings PLC, the world's second-largest bank by market value.

Her lawsuit said MBNA let her exceed her credit limit, then imposed a $29 fee for every month her balance remained over the original limit. Instead of listing the fee as a finance charge, the company posted it as a new purchase on which she had to pay additional finance charges, said her lawsuit, which sought class action status.

Pfennig's suit, filed in federal court in Ohio, sought damages and a declaration that the over-limit fee wasn't properly disclosed.

The 6th U.S. Circuit Court of Appeals ruled that she could sue, saying the Federal Reserve rule was invalid because it conflicted with the truth-in-lending law. Over-limit fees must be included in finance charges whenever a company knowingly lets a customer exceed the credit limit, the court said.

The appeals court said Pfennig couldn't sue MBNA for financial damages because the credit card company relied on the Federal Reserve rule in good faith. Still, the court said, she could pursue her request for a declaration that the fee wasn't properly disclosed.

The Supreme Court reversed that decision.

Thomas said the 6th Circuit had adopted a case-by-case approach, depending on the type of transaction that "would prove unworkable to creditors and, more importantly, lead to significant confusion for consumers."

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