WASHINGTON -- The American Bankers Association urged a federal appeals court Monday to uphold a decision permitting banks to "export" late fees, even to customers in states that don't permit such charges.

Failure to do so could destroy credit competition and hamper the industry's ability to engage in interstate lending, argued Michael F. Crotty, the ABA's general counsel for litigation, in a brief.

The case centers on a dispute between Delaware, which allows banks to charge credit card late fees, and Pennsylvania, which-does not allow late fees on cards. Pennsylvania does allow late charges on other unsecured personal loans.

The ABA contends there is no difference between credit card loans and unsecured loans. Therefore, if Pennsylvania allows some institutions to collect late fees, out-of-state banks also should be allowed to collect them, Mr. Crotty said.

Pennsylvania officials argue that the laws apply to interest rates, not fees,

This is the second time this battle has weaved its way through the federal courts. In 1992, the First Circuit struck down a Massachusetts law prohibiting banks from charging late fees on credit cards.

The Supreme Court refused to hear an appeal, which essentially made the late fees legal in Massachusetts, Rhode Island, Maine, and New Hampshire. But federal courts in other states are not bound by the decision.

Heading to Court

That set up the Pennsylvania challenge, which is pending before the third circuit.

Mr. Crotty wrote in the brief that several. federal laws attempt to "even the playing field" by allowing each federally insured institution to use the most favorable package of loan charges allowed Under state law.

He said Pennsylvania's law circumvents that intent and provides in-state banks with an unfair advantage because some of its banks can charge late fees on unsecured personal loans while out-of-state credit card banks cannot.

If in-state banks gain that competitive advantage, out-of-state banks might retreat. This would reduce competition and could lead to chaos in the industry as consumers struggle to find lenders, Mr. Crotty said.

It also would lead to higher prices, he wrote.

Finally, the Pennsylvania law is unpractical, Mr. Crotty said.

It would force banks with customers outside their state to establish elaborate computer systems, he added. The reason: banks no longer could use standard forms because each state may limit loan charges differently.

"These burdens are very real and significantly affect operational costs, especially if a federally insured despository institution's loan program involves the law of 50 different states," Mr. Crotty wrote.

A hearing date has not yet been set.

Mr. Crotty filed a brief in the Pennsylvania case Spellman v. Meridian on behalf of the ABA, the American Financial Services Association, the Consumer Bankers Association, the New Jersey Bankers Association, the DelaWare Bankers Association, and the Pennsylvania Bankers Association.

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