Card Pricing Suit Reaches Supreme Court

The U.S. Supreme Court agreed to hear a case involving what a Federal Appeals Court has ruled to be a card issuer's error in failing to disclose overlimit fees as part of the finance charge. What makes the case unusual is that all parties agree that the issuer (Household Credit Services) followed the Truth-in-Lending disclosure rules as set forth by the Federal Reserve in Regulation Z. At issue is the court's finding that the Fed itself has inappropriately interpreted the Truth-in-Lending Act in issuing its Reg Z.

The case involves an Ohio consumer, Sharon Pfennig, who claims that Household Credit Services did not properly disclose fees for exceeding the limit on her credit card. The account was subsequently sold to MBNA America Bank. In 2002 the U.S. Court of Appeals for the Sixth Circuit remanded the case back to the U.S. District Court for the Southern District of Ohio, ruling that Household should have categorized over-limit fees as finance charges, rather than listing them as "other charges" on the account statement. The American Banker reported that Pfennig plans to seek class-action status. Household Credit Services and MBNA appealed the ruling to the U.S. Supreme Court, which agreed on June 27 2003 to hear the case. A decision is expected in mid-2004.

Legal experts say that if the Supreme Court upholds the appellate court decision, it will be a rare instance of the U.S. court system overruling a Federal Reserve interpretation. Oliver Ireland, former Fed associate general counsel, told the American Banker that this case is different from previous court challenges of Federal Reserve regulations. He said, "normally, you'd go after a Fed rule because it's directly inconsistent with the statute. Here, they've attacked a rule clarifying a series of terms that just have to be considered ambiguous." He went on to explain that in passing the Truth In Lending Act, Congress had deliberately left the definition of a finance charge up to the regulator. "Someone needs to have discretion in deciding what goes where (in a credit disclosure) and that's got to be the agency."