Supreme Court OKs Late Fees on Credit Cards

Credit card holders who fail to pay their monthly bills on time can be charged a late fee of $20 or more, the Supreme Court said Monday, even when state law normally protects consumers from these penalties.

In a 9-0 decision, the justices agreed with the California Supreme Court that banks are governed by the law in the state where they are located, not by the laws where their customers live.

As a practical matter, the decision is likely to encourage more banks to establish their credit card operations in states that set no limits on the fees they charge, such as South Dakota and Delaware.

Consumer activists urged credit card holders to pay attention to the home address of the bank that issues their cards.

“Consumers need to educate themselves and shop around,” said Patricia Sturdevant, a San Francisco attorney for the National Assn. of Consumer Advocates. “There is a tendency not to pay attention to these [fee] provisions until you get burned.”

In California, the state prohibited most fees until 1994. Two years ago, the banking industry won a new law in Sacramento that sets a sliding scale of fees for those who do not pay their monthly balances by the due date. Those who are five days late can be charged $7. The allowable fees increase the longer the payment is late.

Fees are likely to be even higher if the card is issued from a bank elsewhere. Citibank, the largest card issuer, operates from Sioux Falls, S.D., while six of the other top 10 issuers are in Delaware.

A recent survey found that late fees are typically between $18 and $20, but in theory Monday’s decision would allow the banks to charge much more.

The case highlighted the staggering size of the credit card industry, as well as the growth of consumer debt.

Last year, credit card companies sent out nearly 2.7 billion letters offering new cards. Many customers find themselves tossing out such solicitations daily.

Already, Visa and MasterCard have 343 million cardholders. And as more Americans use cards for more purchases, the outstanding balances have risen. For individuals, the average balance has gone up from $400 in the early 1980s to an estimated $1,750 last year.

In total, Americans had outstanding credit card balances of $305 billion at the end of last year.

Californians have been particularly active--and, until recently, successful--in challenging various bank fees in court.

Monday’s case arose when Barbara Smiley, a Los Angeles homemaker, complained about a $15 late fee charged on her Citibank Visa card. In 1992, she became the lead plaintiff in a class-action suit that challenged fees charged by out-of-state banks.

Her lawyers argued that Citibank should not be allowed to “export” South Dakota’s laws to California.

In September, however, the California Supreme Court ruled for the banks on a 5-2 vote. The U.S. high court agreed to hear the appeal in the case (Smiley vs. Citibank, 95-860) to resolve an issue that has arisen around the nation.

The legal question turned on whether a late fee is “interest.” The National Bank Act of 1864 says that banks may charge “interest at the rate allowed by the laws of the state . . . where the bank is located.”

And the U.S. comptroller of the currency recently defined interest as “any payment compensating a creditor . . . for an extension of credit.” The examples cited included late fees, annual fees and charges for exceeding a credit limit.

The high court, in a brief opinion, said that the comptroller’s definition was reasonable and deserved to be upheld.

The Los Angeles lawyer who represented Citibank in the case said he was pleased that the court upheld a policy of free competition over state regulation.

“I think this will put an end to the litigation over bank fees on credit cards,” said Richard B. Kendall of Shearman & Sterling.

But he argued that bank fees will be limited by competition. Citibank’s $15 late fee is lower than the industry average cited by consumer groups, he noted.

“This is a very competitive market and consumers tend to select the menu of charges that meets their objectives,” Kendall said. “It’s true, though, that most banks don’t compete on late fees because they don’t necessarily want to attract customers who pay late. Studies have shown those customers are six times more likely not to pay at all.”

But consumer activists said that most cardholders do not pay attention to fees and predicted that the decision will encourage banks to raise them.

“Because of some successful court cases, Californians have generally enjoyed more reasonable fees than the rest of the country,” said Ken McEldowney, executive director of Consumer Action in San Francisco.

Some card issuers still charge late fees of $5 or less, he said. “In the short term, I think Californians will see those fees rise. And, for the future, it means it will be difficult to challenge them,” he said.

In other action Monday, the court:

* Agreed to decide whether California growers and shippers of peaches, plums and nectarines can be required to help pay for generic advertising of those products. A lower court called this a free-speech violation. The case (Glickman vs. Wileman Bros., 95-1184) will be heard in the fall.

* Upheld the military death penalty by a 9-0 vote, rejecting a broad constitutional challenge (Loving vs. United States, 94-1966).