The proliferation of credit cards has led to heightened judicial and legislative scrutiny. Some consumer litigation targets the fees and charges set forth in credit card agreements.
These agreements typically allow for multiple fees and charges that are assessed throughout the credit cycle.
It is estimated that issuers can generate incomes up to 2% of total card balances by assessing annual fees, over-limit fees, late fees, and others. With interest margins shrinking and cardholder competition intensifying, issuers are constantly seeking new and creative ways to assess these fees.
Most issuers market their credit cards throughout the United States. Issuers often "export" to other states the interest rates, fees, and charges permissible in their home states.
Card issuers indisputably may export their home-state interest rates to customers in other states. And until recently, the exportation of annual fees, late charges, and over-limit fees had been permitted in every jurisdiction that had confronted the exportation issue on its merits.
In two recent decisions, Pennsylvania's intermediate appellate court denied out-of-state banks' efforts to export late charges and other penalty fees into Pennsylvania via their credit card agreements.
Many courts that have addressed fee exportation have opined only on the limited issue of federal-question jurisdiction. These are interim decisions on motions for removal by banks whose late fees were challenged or, conversely, motions by plaintiff cardholders to remand their causes of action back to state courts.
These courts, with the exception of one Colorado district court, have determined that section 85 of the National Bank Act or its state-chartered bank counterpart, the Depository Institutions Deregulation and Monetary Control Act of 1980 in section 521, so completely preempt this area of law that any civil complaint that alleges exportation violates state consumer protection laws is necessarily federal in character.
The issue first received critical analysis in the First Circuit Court of Appeals decision, Greenwood Trust Co. v. Commonwealth of Massachusetts. Because every subsequent decision on the merits of exporting penalty charges relies upon some or all of the Greenwood Trust reasoning, it provides a natural point of departure for this discussion.
Greenwood imposed substantial late charges, permitted in its home state of Delaware, to 100,000 Discover cardholders in Massachusetts, which prohibited such fees. When the State of Massachusetts threatened to sue, the card issuer countered with a complaint seeking a declaration that federal law preempted Massachusetts' state law.
The first circuit acknowledged that the 1980 law contained an express federal preemption clause relating to the interest charged on card accounts. Nonetheless, the court determined that the scope of federal preemption was unclear because the law did not specifically define "interest" within the statute.
The court then opined that the meaning was not necessarily restricted to a numerical percentage rate. Focusing on the fact that the 1980 banking law contained language nearly identical to the National Bank Act, the first circuit cited several cases in which interest was said to include a variety of lender-imposed fees and financial requirements. It found that a broad interpretation was consistent with Congress' intent when it enacted the law - to assure competitive equality among financial institutions.
The first circuit recognized that the state statute at issue in Greenwood Trust visited two areas of law that are squarely within the ambit of states' historical powers - banking and consumer protection. But the court said federal preemption was not foreclosed by the fact that the federal statute intrudes into areas where states traditionally exercised their police powers. Section 521 of the law expressly preempted any conflicting Massachusetts law.
Soon after Greenwood Trust, the first circuit's analysis was extended to national banks exporting late fees. Recently, a federal district court ruled in favor of card issuers with annual fees and late charges. State courts in New Jersey and Colorado have also addressed the merits of exportation and ruled in favor of the card issuers.
In Mazaika v. Bank One, a divided intermediate appellate court in Pennsylvania concluded, in two cases consolidated for the purposes of appeal, that a national bank in Ohio (Bank One) and two Delaware state- chartered banks (Chase Manhattan (USA) and Greenwood Trust) could not export into Pennsylvania late charges, over-limit and returned-check fees.
Citing the earlier Greenwood Trust case, the card issuers argued that exportation was permissible because the National Bank Act preempts Pennsylvania's consumer protection laws. Bank One further postulated that because membership fees, late payment charges, and over-limit fees were included in the definition of "interest" in the Ohio statute, even absent complete federal preemption, Bank One's over-limit and late penalties were exportable into Pennsylvania pursuant to the landmark 1978 decision on card interest rates, Marquette National Bank of Minneapolis v. First Omaha Service Corp.
The Pennsylvania court ruled that in the absence of an express statement by Congress that state law is preempted, there are only two instances where federal preemption occurs: when Congress intends that federal law occupy a given field, and when state law actually conflicts with federal law such that compliance with both is impossible, or the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.
The Pennsylvania court found that there was no express preemption via the two federal banking laws because "interest" was not specifically defined in either one. The court further determined that banking was not an area of law in which Congress had evidenced an intent to occupy the entire field to the exclusion of the states.
The Pennsylvania appellate court also distinguished those decisions subsequent to the enactment of the National Bank Act where courts broadly interpreted the term "interest" to include charges beyond the periodic rate. Also, the Truth-in-Lending Act and Regulation Z specifically exclude such charges from the computation of the finance charge.
Quickly disposing of the Ohio bank's alternative argument, the Pennsylvania court narrowly interpreted Marquette as limited to the singular issue of whether a national bank, located in a single state, could provide different rates of interest to customers who had other domiciles. Marquette, said the court, was inconclusive on late fees' or penalty charges' being included among exportable costs under the protection of the NBA.
Within a month of Bank One, the same intermediate Pennsylvania court extended its export prohibition to state-chartered banks doing business in Pennsylvania. Citing Bank One, the appellate court reiterated that federal law - specifically the '80 law - did not preempt all Pennsylvania state consumer protection and usury laws. State-chartered banks could only export their percentage rates of interest.
As of this writing, the Pennsylvania Supreme Court had not granted certiorari in either Bank One or Chase Manhattan.
The Pennsylvania courts' rejection of Greenwood Trust and its progeny understandably sounded an alarm in the card industry.
An obvious point of contention with the Pennsylvania appellate court's analysis is that the dictionary definitions of "interest" do not necessarily limit the term. The Office of the Comptroller of the Currency, the regulator of national banks, has consistently interpreted interest to include other than numerical percentage rates.
A convincing argument may also be made that the narrow interpretation of interest is inconsistent with the stated intent of the National Bank Act and the 1980 law. Each act was promulgated to allow card issuers to charge interest at any rate allowed by law in the state where the lender or card issuer is located.
Allowing Pennsylvania to enact laws prohibiting local banks and savings institutions from assessing late fees and service charges appears contrary to Congress' attempts to create uniformity within the banking industry.
Also implicit in the Pennsylvania courts' analysis is the rejection of the argument that Congress, by incorporating identical language on "interest" from the National Bank Act into the 1980 law, tacitly approved the prior decisions of several courts that broadly interpreted the term. The Pennsylvania appellate court seemingly believes that Congress enacted the law in a vacuum, oblivious to prior courts' expansive view of "interest."
Importantly, the appellate court's analysis in Bank One and Chase Manhattan fails to properly consider why late charges and over-limit fees are assessed in the first place - for reasons that relate to the risks and costs associated with delinquent borrowers. Simply because these charges are contingent should not set them apart from the definition of interest. Many credit card charges, including the regular finance charges, are contingent upon whether the customer draws on the account and the duration of draw period.
The Third Circuit Court of Appeals will soon decide the issuer-friendly Ament v. PNC decision from Pennsylvania' s Western District federal court. Should the third circuit deal with the merits of exportation - it need not do so because it could affirm or reverse the district court solely on jurisdiction - an opinion consistent with Greenwood Trust would serve as a significant affirmation of fee-export practices.
State appellate courts in New Jersey and California may also address the merits of exportation in the near future.
Unfortunately, in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Congress failed to provide any further guidance on the scope of federal preemption.
Since card-fee exportation is almost universal, issuers anxiously await a definitive outcome. While the Bank One and Chase Manhattan decisions seem to be aberrations that will not be followed in other jurisdictions, issuers are forewarned and should proceed with caution.
