The U.S. Supreme Court, siding with Citicorp in a closely watched case, ruled Monday that states may not regulate the fees charged by out-of-state credit card banks.
The ruling is crucial for large, nationwide credit card issuers. Many of these companies have based their strategies on the ability to export fees into other states.
The decision "upholds a practice the banking industry has engaged in for more than a decade," said Alan Kaplinsky, a partner at Ballard, Spahr, Andrews & Ingersoll in Philadelphia. "It's as complete a victory for banks as we could have hoped for."
The high court handed down a unanimous decision in Smiley v. Citibank, deferring to a definition of "interest" by the Comptroller's Office. The agency in February 1995 said a wide variety of bank charges, such as late fees, membership fees, and over-the-limit fees, are considered interest payments.
"We're very gratified that the court confirmed our interpretation of the National Bank Act," said Julie Williams, the OCC's chief counsel. The decision, she said, will help banks operate more efficiently, "allowing them to impose charges on those consumers that pay late," rather than boost interest rates and fees across the board.
The case began in California in 1992 when Barbara Smiley sued Citibank's South Dakota credit card bank, arguing that its $15 late fee could not be considered interest because it was not money paid on the amount loaned. The California courts consistently ruled in favor of Citibank, but the Supreme Court agreed in January to hear Ms. Smiley's appeal.
On Monday, Justice Antonin Scalia explained that the court took the case to clear up any confusion created by a separate New Jersey Supreme Court ruling, also involving Citibank, that took a more narrow view of "interest."
Michael Crotty, deputy general counsel at the American Bankers Association, said the Supreme Court's decision will affect other litigation battles. "There's a couple dozen cases out there that will all go away now," he said.
Mr. Kaplinsky agreed. "We would hope that plaintiffs' attorneys would at this point throw in the towel."
Maria Mendler, a Citicorp spokeswoman called the decision "affirmed that late fees are fair and properly allocate delinquency costs to people who pay late." She said the ruling is "a big victory for 97% of cardholders who pay their bills on time."
Even so, consumer advocate Edward Mierzwinski, consumer project director of the U.S. Public Interest Research Group in Washington, called it "bad law and bad policy to continue to allow banks to go to states that treat them best and consumers worst." He said the comptroller's "claim that late charges are interest is a misinterpretation of federal law."
Mr. Mierzwinski said his organization will turn to Congress to correct what he labeled a poorly written law.
Janice Shields, research analyst at the Center for Study of Responsive Law, a Washington-based organization affiliated with Ralph Nader, said the ruling "eliminates state consumer protection laws."
But the ABA's Mr. Crotty said consumer groups are being "shortsighted." He wondered why consumer advocates would support the rights of consumers who pay late, and not those of consumers who pay on time.
"Banks are like any other business," he said. "We can't give away our products; someone needs to pay."
Ms. Williams contended that consumers can choose a card issued nationally or locally, and consumer advocates should "increase consumer awareness of the importance of reading what's on the application and shopping for the best rates and terms."
Even so, states with the least-restrictive laws, such as South Dakota and Delaware, attract big card issuers and the jobs that come with them. Many banks have already moved their card operations to such states. Some states are loosening regulations in response to bankers' needs.
Gregory Wilhelm, senior vice president and director of government relations at the California Bankers Association, said he is working to liberalize California law in terms of late fees and over-limit fees.
"It's a national market place with lots of choices," said Mr. Wilhelm. "State efforts to artificially restrict these things are to nobody's benefit."
