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Over-Limit Fees Not Finance Charges, Supreme Court Says
A fee charged by a credit card company to a consumer for exceeding her preset
credit limit was not a finance charge as contemplated by the Truth in Lending
Act (TILA) and Reg. Z—Truth in Lending (12 CFR 226), the United States Supreme
Court has determined. The court's unanimous decision reverses an opinion by the
U.S. Court of Appeals for the Sixth Circuit that Reg. Z could not exclude the
charge from being a finance fee because TILA unambiguously included it.
The consumer's credit card had a limit of $2,000; however, she could exceed
that limit if she paid a $29-per-month over-limit fee. Under this arrangement,
the over-limit fee was a charge "incident to the extension of credit,"
the appellate court had found, making it a finance charge under TILA. The
Federal Reserve Board had the authority to adopt regulations that implement TILA,
but those regulations could not be inconsistent with the Act, the appellate
court said
The Supreme Court rejected the appellate court's reasoning, finding instead
that TILA was ambiguous and that the ambiguity left room for the Fed to adopt a
regulation.
Meaning of "Finance Charge"
The appellate court was too restrictive in its analysis and should have
considered all of TILA, the Supreme Court began. Specifically, it should have
clarified the key phrase "incident to the extension of credit."
Because it did not, it mischaracterized the nature of the transaction between
the consumer and the credit card company.
The Supreme Court disagreed with the consumer's characterization, accepted by
the appellate court, that the over-limit fee was imposed as a result of the
extension of credit that exceeded the preset limit. A better characterization
would be that the fee was imposed because the consumer's balance exceeded the
limit at the time the monthly charges were calculated. This would make the fee a
penalty for exceeding the credit card agreement's limit, not a charge
"incident to the extension of credit," the Supreme Court said.
None of the examples of finance charges given by TILA were similar to
over-limit fees, the Court also observed. Moreover, when the Act did mention
over-limit fees it described them as charges "in connection with" an
extension of credit, which differs from charges "incident to" an
extension of credit. Thus, at the least, TILA was ambiguous on whether
over-limit fees were finance charges.
Result of Ambiguity
When a statute is ambiguous, a regulation adopted by an agency charged with
enforcing that statute is binding on the courts unless it is "manifestly
contrary" to the statute, the Court said. Reg. Z was not manifestly
contrary to TILA.
Reg. Z was intended by the Fed to emphasize disclosures related to credit
decisions, not the relationship between the lender and the consumer after the
initial credit choice was made, the Court said. That was consistent with TILA's
intent and would help avoid overwhelming consumers with disclosures. It was
rational for the Fed to conclude that fees imposed only when a consumer violated
the credit card agreement were not finance charges, and the appellate court
should not have substituted its judgment for that of the Fed.
Effect of Ruling
The Court's opinion is a clear victory for credit card companies, and a loss
for consumers. Since over-limit fees are not finance charges, they do not need
to be included in the finance charge calculation on a consumer's monthly
statement. Instead, the credit card issuer's practice of posting the fee as a
new debit every month, on which additional finance charges can be imposed, is
permissible.
Household Credit Services, Inc. v. Pfennig (SCt)
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