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Court Strikes Down Reg Z Finance Charge Exclusion

by Sam Ott

It probably looked like it would be a slam dunk victory for the lenders, but it wasn't. Even though the lenders followed the clear direction of a regulation, the court said they goofed because the court believes the regulation is contrary to the statute. . .

On April 11, 2002 the United States Court of Appeals for the Sixth Circuit issued an opinion directly contra to one of the most important sections of Regulation Z -- the section which delineates what is, or is not, a finance charge. In the case of Pfennig v Household Credit Service, Inc. and MBNA America Bank, N.A. the 6th Circuit held that despite the language of Regulation Z that expressly excludes fees charged for exceeding a credit limit from the definition of the "finance charge" such fees were within the statutory definition of "finance charge" found in the Truth In Lending Act (TILA) and must be disclosed as, and treated as, finance charges.

Background
The Plaintiff held a credit card originally issued by Household Credit whose credit card portfolio was subsequently purchased by MBNA. The established card limit was exceeded when the Plaintiff attempted to make a purchase. The purchase was approved, which caused the upward extension of the credit line, and the assessment of an over-limit charge of $29.00 a month for every month the credit balance remained over the original limit. The over-limit charges were not included in the finance charge calculations on the monthly statement but were posted as new debits on which additional finance charges were calculated.

The Plaintiff filed a >
The district court granted the Defendants' motion to dismiss the complaint for failure to state a claim because Regulation Z, which was issued to interpret TILA, expressly excludes fees charged for exceeding a credit limit from the definition of the "finance charge." The Plaintiff appealed the decision.

The Arguments
The Plaintiff argued the plain language of TILA required the Defendants to include as a finance charge the monthly fee imposed for exceeding the credit limit even though Regulation Z provides an exclusion. It was the contention of the Plaintiff that when a regulation conflicts with the plain language of the statute, the regulation should be ignored to give effect to the statute. It addition, it was argued the TILA is a consumer protection statute and must be construed liberally.

The Defendant responded that the Regulation Z exclusion of over-limit fees from the definition of finance charge is not contrary to TILA and, even if it was, they acted in good faith compliance with Regulation Z and are immune from civil liability.

The Decision
The Court noted the purpose of TILA was to assure a meaningful disclosure of credit terms so that the consumer will be able to compare the various credit terms available and avoid the uninformed use of credit and to protect the consumer against inaccurate and unfair credit billing and credit card practices. In addition, because the purpose of the Act was to protect consumers, it must be construed liberally in the consumer's favor.

The Court rejected the arguments of the Defendants and reversed the decision of the lower court by holding despite the language of Regulation Z to the contrary, the fee imposed by the Defendants fell squarely within the statutory definition of a finance charge. Regulation Z says that the finance charge does not include "[c]harges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence." TILA, however, 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." The Court reasoned that the $29.00 fee was imposed incident to the extension of credit to the Plaintiff, and, therefore, pursuant to TILA, the Defendants were obligated to disclose the fee as a finance charge on the monthly statement.

The Court concluded the Defendants knowingly allowed the Plaintiff to exceed the credit limit and charged a fee incident to the extension of credit that is by definition a finance charge.

The Court did, however, decide that the Defendants were entitled to immunity from civil liability for the failure to disclose based on their good faith compliance with the provisions of Regulation Z. The decision of the lower court to dismiss the portion of the compliant regarding monetary damages was upheld.

Summary
The United States Court of Appeals for the Sixth Circuit held that over-limit fees charged credit card customers are finance charges under the Truth In Lending Act and must be disclosed in the calculation of the finance charge provided to consumers. This ruling is in direct opposition to the provisions of Regulation Z that expressly excludes fees charged for exceeding a credit limit from the definition of the "finance charge".

The Court ruled that Defendant lenders who relied on the exclusion in Regulation Z were entitled to immunity from civil liability for the failure to disclose. It is not at all clear whether or not the same defense will be available to other lenders who do not include over-limit fees in the calculation of the finance charge disclosures for over-limit credit extension granted after the date of this decision.

As noted by the dissenting judge, "The majority's conclusion in this case effectively amends Regulation Z in this circuit."

First published on BankersOnline.com 4/12/02

First published on 04/12/2002

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