Over-Limit Fees Not Finance Charges, Supreme Court Says

By Richard A. Roth, J.D., Editor, CCH Federal Banking Law Reporter and Bank Compliance Guide; Co-author, Financial Services Modernization - Gramm-Leach-Bliley Act of 1999 - Law and Explanation;  CCH Financial Privacy Law Guide and Bank Digest.

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)