Judge Upholds Bay State Ban on Card Fee

NEW YORK - A U.S. district court dealt a blow to credit card banks last week when it ruled that Sears, Roebuck & Co. cannot charge Massachusetts residents late fees on Discover card payments.

The decision is the first by a federal court rejecting the idea that card issuers can "export" their home states' fee policies.

Greenwood Trust Co., the Sears unit that issues Discover, is based in Delaware and contended it could charge a $10 late-payment fee despite a Massachusetts law prohibiting this.

A Wider Relevance

"It's bad for banks," said John L. Culhane Jr., a lawyer at Wolf, Block Schorr and Solid-Cohen in Philadelphia. "It calls into question the pricing of basically all interstate loans."

Discover ran afoul of a 10-year-old Massachusetts law that prohibits extra charges to consumers who fall behind on their payments. U.S. District Judge William Young ruled that the Massachusetts law took precedence over Delaware's.

A spokewoman for Discover Card Services Inc., Chicago, said Friday that the company will appeal the 67-page decision.

In 1978, the U.S. Supreme Court ruled that national banks could impose nationwide the interest rates permitted by their home states. That prompted many large banks to charter credit-card and other lending operations in Delaware, South Dakota, or other states that had repealed interest-rate ceilings.

The Greenwood Trust decisions is the first to addressed other charges, such as late fees, annual fees, and over-the-limit fees.

"From the standpoint of banks, pricing is all related," said Mr. Culhane, counsel to the Consumer Bankers Association, which filed a friend-of-the-court brief in the Greenwood case. "It doesn't make sense to say you can't charge these fees" but you can export interest rates.

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