The Supreme Court sided with MBNA America in a consumer suit challenging the bank's right to charge interest on over-limit fees.
The Justices affirmed a Federal Reserve Board rule which permits credit card companies to impose the fee separately from finance costs. The high court rejected a customer's claim that MBNA, the world's second-largest credit card issuer, should be barred from listing the fee as a separate purchase that accrues interest charges.
Sharon Pfennig sued the bank claiming it violated the Truth in Lending Act by letting her go over her credit limit, then charging her over-limit fees and interest. Pfenning, an Ohio State University student at the time, soon found herself $700 in debt.
"They authorize the extension of credit," Sylvia Goldsmith, Pfennig's attorney, argued. "They charge her interest. Then they charge her the penalty, $29, then they charge her interest on the penalty."
At issue was the 1968 federal Truth in Lending Act, which requires lenders to disclose credit terms, including finance charges and the annual percentage rate. The law doesn't spell out whether over-limit charges must be included in the finance charge. Since 1981, the Federal Reserve has had a rule allowing such fees to be charged separately from finance costs.
Siding with MBNA were the Bush Administration, the American Bankers Association, MasterCard International Inc. and Visa USA Inc. The Bush administration said a lower court that ruled in Pfennig's favor should have deferred to the Federal Reserve's interpretation of the truth-in-lending law.
"It is perfectly reasonable to characterize an over-limit fee not as a charge imposed for obtaining an extension of credit over a consumer's credit limit, but rather as a penalty for violating the credit agreement," Justice Clarence Thomas wrote for the court.
Pfennig's suit said MBNA let her exceed her credit limit, then imposed a $29 fee for every month her balance remained over the original limit. Instead of listing the fee as a finance charge, the company posted it as a new purchase on which she had to pay additional finance charges, said her lawsuit, which sought class action status.