Sixth Circuit CUs Try to Make Sense of Appeal Court's Decision in Credit Card Case

COLUMBUS, Ohio – A recent court decision is forcing credit unions and other financial institutions that have members or customers in four Central states to reconsider the way they handle their credit card business. Last year, a panel of the U.S. Sixth Circuit Court of Appeals, in Pfennig V. Household Credit Services Inc., ruled 2-1 in favor of a plaintiff who objected to a $29 over-limit fee added to her account as a debit, arguing that the fee was actually an additional finance charge. The plaintiff was hoping to turn this into a class action. The district court dismissed the suit, saying that Federal Reserve Regulation Z, which implements the Truth-in-Lending Act (TILA), expressly excludes fees charged for exceeding a credit limit from the definition of the finance charge. The Sixth Circuit encompasses Kentucky, Michigan, Ohio and Tennessee. Pfennig appealed the decision from the Federal District Court in southern Ohio and the appeals court ruled that the portion of Reg Z that exempts these fees from the finance charge is an incorrect interpretation TILA. As noted by the dissenting judge, “The majority’s conclusion in this case effectively amends Regulation Z in this circuit.” But the consequences spread further. “It is a national concern,” said Jeff Bloch, CUNA assistant general counsel. “It impacts all credit unions that have members or accounts in those states. Anne Gehring, associate counsel for the CUNA Mutual Group agreed. “We’re recommending to credit unions that if they have cardholders within the Sixth Circuit they need to follow the decision.” The decision does not affect finance charge calculations for other credit unions and their customers in other states and it is not even clear that financial institutions need to immediately change their practices. The original court decision was handed down in April, but defendants Household Credit Services and MBNA American Bank NA asked for a rehearing, which delayed implementation of the ruling. The Sixth Circuit denied a rehearing, after which the defendants asked the U.S. Supreme Court to take the case. The request for certiorari is pending. Debbie Painter, a spokesperson for the Kentucky Credit Union League, said credit unions in her state are confused about how to proceed. “Some are just going to discontinue the fee, it’s not that big of a money maker,” she said. “At some credit unions, though, their internal legal counsel doesn’t seem to think it affects them.” Susan Stawick, spokesperson for the Federal Reserve Board of Governors, said the Fed issued guidelines to financial institutions in August but withdrew them since the case is still pending before a court since Fed attorneys believe it’s not clear that the court ruling should change the way banks do business. “The case is not final,” she said, “therefore banks are continuing to rely on our rules.” David Shoup, director of research and information for the Ohio Credit Union League, said his league is advising credit unions to heed the court’s ruling. “We’re advising credit unions, `Do not charge over-limit fees,’” he said. A regulatory alert sent to Michigan credit unions, also counseled conforming policies to the court decision. “Unless and until the 6th Circuit or the United States Supreme Court holds otherwise, this decision is the law of the land,” wrote Ken Ross, director of regulatory affairs for the Michigan Credit Union League. The issue at the crux of the case is whether or not the creditor knowingly allows a borrower to exceed an approved financial limit. In the Pfennig case, the court ruled that the over-limit fee should be included in the finance charge because, after Pfennig reached her credit limit, she requested more credit. She did so by making a purchase that exceeded her credit limit. The financial institution, by approving the extension of credit at the time of purchase, permitted her to exceed the limit, then charged her a $29 fee for that extension. The appeals court decision said, “TILA defines the finance charge as the sum of `all charges’ paid by the person to whom credit is extended and assessed by the creditor `as an incident to the extension of credit.’” Had the financial institution not granted Pfennig’s request for additional credit, which resulted in her exceeding her credit limit, the decision said, “They would not have imposed the over-limit fee. Thus, under a plain reading of 1605(a) and the general rules of statutory interpretation, the $29 fee was imposed incident to the extension of credit to Plaintiff, and pursuant to TILA Defendants were obligated to disclose the fee as a finance charge on her monthly statement.” In a compliance guidance to credit unions, Gehring said that, based on the Pfennig case, credit unions can only exclude from the finance charge over-limit fees that the credit union cannot prevent the borrower from exceeding. That would include only those credit card charges for which prior approval is not sought. “Keep in mind that most credit card transactions receive prior approval,” she wrote. “That means that in the Sixth Circuit states, over-the-limit fees for most credit card transactions must be included as part of the finance charge.” Gehring noted that the court said that since the lender relied in good faith on Regulation Z, it was not liable for civil penalties other than actual damages sustained by the plaintiff. Shoup said part of the problem is that the credit-card processors do not yet have programming in place to recalculate a finance charge on a monthly statement when an over-limit fee is charged. But in addition, inclusion of the fees in an APR can push an interest rate beyond a state’s usury limits. A spokesperson for Certegy Inc., a Georgia firm which provides credit and debit card processing to over 6,000 financial institutions, including many credit unions, said, “We are in the process of making the necessary changes to our system” to allow credit unions to follow the changes needed to comply with the appeals court ruling by February. “It took a lot of programming hours,” the Certegy spokesperson said. -