Household Credit Services, Inc. v. Pfennig

PETITIONER:Household Credit Services, Inc. and MBNA America Bank, N.A.
RESPONDENT:Sharon R. Pfennig
LOCATION:Guantanamo Bay, Cuba

DOCKET NO.: 02-857
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 541 US 232 (2004)
GRANTED: Jun 27, 2003
ARGUED: Feb 23, 2004
DECIDED: Apr 21, 2004

Barbara B. McDowell – argued the cause for Petitioners, on behalf of the United States, as amicus curiae
Sylvia Antalis Goldsmith – argued the cause for Respondent
Seth P. Waxman – argued the cause for Petitioners

Facts of the case

Sharon Pfennig went over her $2000 credit limit. The company that issued Pfennig her credit card, Household Credit Services, Inc., charged her a fee of $29 for each month that her balance remained over $2000. This fee was listed in the “Purchases” category on her monthly statement rather than as a “finance charge.” Under the Truth in Lending Act (TILA), any charges “incident to the extension of credit” must be listed separately as “finance charges.”

Household Credit Services chose not to list the over-limit fee as a “finance charge,” however, based on the Federal Reserve Board’s definition of the term, which explicitly excludes “charges … for exceeding a credit limit.” Pfenning countered that the Board’s definition was an unreasonable interpretation of TILA’s plain language and should therefore be disregarded.

The district court sided with Household Credit Services, finding that the the Federal Reserve Board had properly exercised its authority under TILA to define the term, that the definition was a reasonable interpretation of TILA, and that the credit company was therefore justified in relying on its definition. The Sixth Circuit Court of Appeals reversed.


Was the Federal Reserve Board’s exclusion of over-limit fees from the definition of “finance charges” a reasonable interpretation of the Truth in Lending Act?

Media for Household Credit Services, Inc. v. Pfennig

Audio Transcription for Oral Argument – February 23, 2004 in Household Credit Services, Inc. v. Pfennig

Audio Transcription for Opinion Announcement – April 21, 2004 in Household Credit Services, Inc. v. Pfennig

William H. Rehnquist:

The opinion of the Court in No. 02-857, Household Credit Services, Inc. versus Pfennig will be announced by Justice Thomas.

Clarence Thomas:

This case comes to us on a writ of certiorari to the United States Court of Appeals for the Sixth Circuit.

Respondent holds a credit card initially issued by petitioner Household Credit Services, and in which petitioner MBNA America Bank now holds an interest.

Although the terms of respondent’s credit card agreement set her credit limit at $2,000, respondent was able to make charges exceeding that limit subject to a $29 fee for each month in which her balance exceeded $2,000.

Petitioner disclosed the $29 fee in respondent’s monthly statement but did not include the fee under the label “finance charge” because the Federal Reserve Board has issued a regulation called Regulation Z, which excludes from the definition of finance charge fees that are imposed for exceeding a credit limit.

Respondent filed a complaint in the District Court alleging petitioners, that petitioner violated the Truth in Lending Act, TILA, by failing to disclose the over limit fee as a finance charge.

The District Court granted petitioner’s motion to dismiss but a Sixth Circuit panel reversed.

The term “finance charge” is used in 15 U.S.C. Section 1605(a) as an amount “payable directly or indirectly by the person to whom the credit is extended and imposed directly or indirectly by the creditor as an incident to the extension of credit.”

Because respondent alleged in her complaint that petitioners allowed her to make charges that exceeded her credit limit and the over limit charge was charged as condition of this additional extension of credit, the Sixth Circuit concluded that the over limit fee in this case fell clearly and unmistakably under the definition of a finance charge and hence, that Regulation Z’s interpretation of the definition was unreasonable.

In an opinion filed with the Clerk today, we reverse the judgment of the Court of Appeals.

This case presents two questions.

We first ask whether Section 1605(a)’s definition of finance charge clearly covers over limit fees.

If the answer to that question is yes, that is the end of the battle.

If, however, 1605(a)’s definition of finance charge is ambiguous with respect to over limit fees, we then ask only whether Regulation Z is arbitrary, capricious, or manifestly contrary to the statute.

As to the first question, we find that Section 1605(a) does not unambiguously cover over limit fees.

The phrase incident to the extension of credit implies some necessary connection between the antecedent and its object, but it does not make clear whether a substantial as opposed to remote connection is required.

In another TILA provision, over limit fees are defined as fees imposed “in connection with an extension of credit rather than incident to an extension of credit.”

Thus, the best reading of Section 1605(a) might be that over limit fees are excluded from the definition of finance charge.

At the very least, Section 1605(a) is ambiguous regarding this point.

Our only remaining question then is whether the Board’s interpretation of Section 1605(a) is procedurally defective, arbitrary, or capricious in substance, or manifestly contrary to the statute.

Regulation Z is none of these things.

The Board adapted Regulation Z in order to emphasize disclosures that are most relevant to credit decisions, because the imposition of an over limit fee occurs only when a consumer violates the credit agreement.

The Board reasonably concluded that over limit fees are less relevant to determining the true cost of credit and therefore that these fees should be excluded from what is labeled the finance charge.

Regulation Z is consistent with the terms of Section 1605(a) and with TILA’s purpose of promoting meaningful disclosure to consumers.

The opinion of the Court is unanimous.