Amicus Curiae Brief — Massachusetts v. Greenwood Trust Co.

Supreme Court, U.S. ;

i ek SD

(> | DEC. 4 igge

No. mA GEFICE OF THE CLERK

In The

Supreme Court of the United States

October Term, 1992

+

COMMONWEALTH OF MASSACHUSETTS, et al.

Petitioners,

: GREENWOOD TRUST COMPANY,

Respondent.

*

Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The First District

¢

BRIEF OF AMICI CURIAE CONSUMERS UNION

AND CONSUMER ACTION IN SUPPORT OF

PETITION FOR A WRIT OF CERTIORARI

a

James C. STURDEVANT*

Kim E. Carp

STURDEVANT & STURDEVANT

A Professional Corporation

785 Market Street, Suite 500

San Francisco, CA 94103

(415) 495-4140

Attorneys for Amici Curiae

Consumers Union and

Consumer Action

*Counsel of Record

COCKLE LAW BRIEF PRINTING CO, (600) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. When Congress enacted § 521 of the Depository

Institutions Deregulation and Monetary Control Act of

1980 (“DIDA”), 12 U.S.C. § 1831(a), which expressly pre-

empts state limitations on interest rates that may be

charged by state-chartered banking institutions, did Con-

gress also intend to preempt all other state consumer

protection legislation restricting non-interest charges and

penalty fees, including late fees, that may be imposed on

consumers?

2. Assuming Congress did not intend to preempt

state consumer protection statutes limiting the imposition

of penalty fees, did Congress intend to allow certain

deregulated states, such as Delaware, to expand the pre-

emptive scope of § 521 by creating broad, all-inclusive

definitions of the term “interest.”

ii

TABLE OF CONTENTS

Page

QUESTIONS PREGGINIEOD 665s scsccviccccsaveuesnws i

EUR MMOEEE SOP PME 6 eave neces nuweentviuseenazaes 1

et 5 38 ay ye | Bee eee eee e eee tees 2

SUMMARY OF ARGIUMENE... oo. 2cccssenscetccenys 5

PN ee Os eee eer Ter ee per ere re rere 6

I. ALTHOUGH THE CREDIT CARD INDUSTRY

IS GROWING RAPIDLY AND IS EXTREMELY

PROFITABLE, THE MARKET IS LARGELY

NON-COMPETITIVE ON INTEREST RATES

AND PENALTY FEES, PROVIDING CON-

SUMERS WITH MINIMAL INFORMATION

AINGD LEGIT e? CEP ns cen cos ewan ev veens 6

Il. PENALTY FEES ARE A PROFIT-MAKING

MECHANISM THAT CAUSES CONSUMERS

ee a, ery ey ae rere 11

III. THE EXPANSIVE INTERPRETATION OF § 521

OF DIDA ADOPTED BY THE FIRST CIRCUIT

INJURES CONSUMERS BY ALLOWING

SMALL, DEREGULATED STATES SUCH AS

DELAWARE TO SET CREDIT TERMS FOR

CONSUMERS THROUGHOUT THE NATION

AND BY CREATING PRESSURE ON OTHER

STATES TO AVOID OR TO REPEAL CON-

SUMER PROTECTION LEGISLATION......... 15

CLIORL AAAI 5 von oaks) SkRa RAS eee 20

iii

TABLE OF AUTHORITIES

Page

CASEs:

Beasley v. Wells Fargo Bank, N.A., 235 Cal.App.3d

1383, 1 Cal.Rptr.2d 446 (1991), rev. denied ...4, 13, 14

Cippollone v. Ligget Group, Inc., __ U.S. __, 112

cc ekecaeabikssdeaan sas 17

Fort Halifax Packing Co. v. Cayne, 482 U.S. 1 (1987) .... 18

Garrett v. Coast & Southern Fed. Sav. & Loan Assn., 9

ee ee Paes ee We BEOe CEOTOD onan cascccccscs 4, 13

Kovitz v. Crocker National Bank, (Superior Court of

San Francisco Case No. 868914).................-. 14

Lewis v. BT Investment Managers, Inc., 447 U.S. 27

PRS oT eerere reer ree ETE rT eeree 17

Massachusetts v. Morash, 490 U.S. 107, 109 S.Ct.

ee i oa ee Sane ewe wae 4 17

McClendon v. Security Pacific National Bank, (Supe-

rior Court of Alameda County Case No.

CEC e Gad sake dass ea havaccvasesens 14

Perdue v. Crocker National Bank, 38 Cal.3d 913, 702

P.2d 503 (Cal. 1985), appeal dismissed 475 U.S.

eC ae kasha ne eb een eues 17

STATUTES:

es Wing S 5 CARA AS 64S eee RAS oem Hoe 17

California Civil Code Section 1671.................. 13

iv

TABLE OF AUTHORITIES - Continued

Depository Institutions Deregulation and Mone-

tary Control Act of 1980, 12 U.S.C. § 1831d(a) ...1, 3

Employees Retirement Income Security Act, 29

i 2S ok 2. Ary Sere ae errs 17

OTHER AUTHORITIES:

“Group Advocates State Regulation of Credit

Cards,” American Banker (July 29, 1987)........... 19

“Mad As Hell About Late Fees,” Business Week

Pe CSE as See snvidentisenccueebens exe eaes 14, 19

“Pushing Plastic is Still Only Juicy Game,” Busi-

ke Serene 9, 19

“Small States Teach a Big Banking Lesson,” Chi-

oe a! | eer ers ree 16

“The Big Squeeze,” The Economist (Nov. 2, 1991) ..... 8

Ausubel, “The Failure of Competition in the

Credit Card Market,” The American Economic

ee Ss SEP ak ek ha web oe e ewe 8, 9, 10, 11

Calem, “The Strange Behavior of the Credit Card

Market,” Federal Reserve Bank of Philadelphia

Business Review (January/February, 1992). 7, 8, 10, 11

Credit Card Management, Card Industry Directory:

The Blue Book of the Credit and Debit Card Indus-

try in the United States (1992 ed.) ............ 7, 9, 16

Stewart, “How Penalty Fees Are Rewarding

Banks,” Credit Card Management (Nov. 1991)....... 12

The Nilson Report (Nov. 14, 1991)............... re 82

INTEREST OF AMICI!

Consumers Union is a nonprofit membership organi-

zation chartered in 1936 under the laws of the State of

New York to provide consumers with information, educa-

tion and counsel about goods, services, health, and per-

sonal finance; and to initiate and cooperate with

individual and group efforts to maintain and enhance the

quality of life for consumers. Consumers Union’s income

is derived from the sale of Consumer Reports, its other

publications and from noncommercial contributions,

grants and fees. In addition to reports on Consumers

Union’s own product testing, Consumer Reports, with

approximately 5 million paid circulation, regularly carries

articles on health, product safety, marketplace economics

and legislative, judicial and regulatory actions which

affect consumer welfare. Consumers Union’s publications

carry no advertising and receive no commercial support.

Consumers Union has offices in Yonkers, New York,

Washington, D.C., Austin, Texas and San Francisco, Cali-

fornia.

One of Consumers Union’s activities is to provide

legislative and administrative advocacy at the national

and state level on issues that affect the quality of life for

consumers, including issues affecting credit and banking

services. Consumers Union has a substantial interest in

this litigation because the Court of Appeals’ holding that

§ 521 of the DIDA, 12 U.S.C. § 1831d(a), preempts states’

efforts to enforce consumer protection statutes against

1 Pursuant to Supreme Court Rule 37.2, letters expressing

the written consent of the parties to the filing of this brief on

behalf of amici Consumers Union and Consumer Action are filed

herewith.

2

out-of-state credit card issuers will significantly impair

Consumers Union’s ability to advocate for state consumer

protection legislation affecting credit card users in Cali-

fornia and elsewhere.

Consumer Action is a non-profit, membership orga-

nization committed to consumer education and advocacy.

The organization was established twenty-one years ago in

California and currently has approximately 1600 mem-

bers. As a service to consumers in California and else-

where, the organization publishes and distributes

approximately 1 million pieces of literature per year, in

eight different languages, on banking, credit and utility

issues, including an annual survey of bank credit card

terms. In addition, the organization is actively involved

in policy and legislative advocacy on credit and banking

issues on behalf of consumers at both the state and

national levels. Consumer Action has an interest in this

litigation because members of the organization are enti-

tled to the protection of state legislation prohibiting

excessive fees and because the Court of Appeals’ finding

that § 521 preempts state statutory provisions prohibiting

late fees will significantly impair Consumer Action’s abil-

ity to lobby for consumer protection legislation in Califor-

nia and elsewhere.

INTRODUCTION

Consumers Union and Consumer Action submit this

brief as amici curiae in support of Petitioner, the Common-

wealth of Massachusetts (“Massachusetts”), and urge this

Court to grant a writ of certiorari, reverse the decision of

the First Circuit Court of Appeals, and decide the impor-

tant issue of whether § 521 of the Depository Institutions

i si

3

Deregulation and Monetary Control Act of 1980

(“DIDA”), 12 U.S.C. § 1831d(a), precludes states with

consumer protection statutes from enforcing prohibitions

against excessive penalty charges imposed by out-of-state

credit card issuers.

A penalty fee is a fee, usually between $10 and $15,

imposed by banks on credit card users who make a late

payment, exceed their credit limit, or make a payment

with a check drawn on insufficient funds. These fees are

imposed by banks separate from and in addition to the

interest charges imposed each month and the annual fee,

which statistics show provide more than ample profits for

issuers.* Penalty fees cost consumers over $1 billion last

year, causing them substantial financial injury. Although

the particular fee at issue in this case is a $10 late fee, the

preemption issues raised are equally applicable to all

penalty charges.

Recognizing that penalty fees can often catch con-

sumers unaware and present a serious financial burden, a

growing number of state legislatures has prohibited these

fees as unfair and deceptive. In addition to petitioner

Massachusetts, several other states, including Pennsylva-

nia, Minnesota, Iowa and Maine, among others, have

either limited or prohibited late and overlimit fees and

are now moving to enforce these statutes against out-of-state

lenders. The important issue presented by this litigation

2 Most credit card issuers are banks. Recently, non-banking

corporations, including AT&T and General Motors, have begun

entering the market. Throughout this brief, the term “issuer”

refers generally to both bank and non-bank issuers of credit

cards.

3 California has a more general statute that prohibits the impo-

sition of unlawful liquidated damages on consumers. California

4

is whether § 521 of DIDA, which expressly preempts only

state statutes limiting the interest rate that may be charged

by state chartered banks, also preempts those state con-

sumer protection statutes which regulate non-interest,

penalty fees. In particular, the issue is whether, under

§ 521, banks chartered in deregulated states may “export”

penalty fees allowed in their home state to consumers

residing in other states where the fees are prohibited.

The First Circuit interpreted the term “interest” in

§ 521 broadly, holding that Respondent Greenwood Trust

Company (“Greenwood”) could export fees allowed by

Delaware and impose them. on consumers in Massa-

chusetts. This expansive interpretation, which is not sup-

ported by either the language of the statute or its

legislative history, will cause substantial injury to con-

sumers. If not reversed, the ruling below will permit a

few small states that have chosen to cater to banking

interests to deregulate the industry on a national basis.

Furthermore, the interpretation of the Court of Appeals

below undermines state consumer protection efforts

because allowing banks chartered in small, deregulated

states to export penalty fees creates pressure on other

states to repeal consumer protection statutes in order to

retain banking and credit card-related jobs and revenues

in an increasingly concentrated banking industry. As the

credit card industry becomes more dominant in the mar-

ketplace and more concentrated in deregulated states, it

Civil Code § 1671(c) and (d). That statute, as interpreted, pro-

hibits lenders and credit card issuers from charging and retain-

ing any sums from penalty fees that exceed the actual damages

caused by a consumer’s breach of the credit agreement. See e.g.

Garrett v. Coast & Southern Fed. Sav. & Loan Assn., 9 Cal.3d 731,

511 P.2d 1197 (1973); Beasley v. Wells Fargo Bank, N.A., 235

Cal.App.3d 1383, 1 Cal.Rptr. 2d 446 (1991), rev. denied.

5

is vital that consumers receive the protection of state

statutes limiting penalty charges and other unfair prac-

tices.

¢

SUMMARY OF ARGUMENT

Consumers Union and Consumer Action, non-profit

consumer organizations, urge this Court to grant a writ of

certiorari to Massachusetts because the decision of the

First Circuit, expansively interpreting the preemptive

effect of § 521 of DIDA, raises important issues nationally

for consumers and states attempting to enforce consumer

protection legislation. Credit cards are a rapidly growing,

extremely profitable industry within which consumers

have limited choices and often find themselves at the

“mercy of card issuers. The First Circuit’s holding allow-

ing exportation of penalty fees, including late charges,

from deregulated states favoring banking interests,

causes substantial injury to consumers in two ways. First,

the great majority of consumers already pay substantial

non-market based interest charges for the use of a credit

card; additional penalty fees are unnecessary and oppres-

sive. This is particularly true because consumers gener-

ally incur penalty fees as a result of circumstances

beyond their control. Second, a broad interpretation of

§ 521 allowing the exportation of penalty fees under-

mines states’ legitimate efforts to enforce consumer pro-

tection legislation limiting such fees and creates pressure

for state legislatures to deregulate in this area. Because of

the importance of these issues and their effect on the

welfare of consumers throughout the country, this Court

should grant certiorari to determine whether the First

Circuit improperly interpreted the preemptive scope of

§ 521 beyond that apparent in the statute, intended by

6

Congress, or sanctioned by this Court’s recent preemp-

tion jurisprudence.

*

ARGUMENT

Credit cards have become an increasingly dominant

segment of the American economy. Credit card lending is an

extremely lucrative industry for banks and other issuers that

significantly impacts on the financial welfare of consumers.

The imposition of penalty fees separate from and in addition

to interest charges is a growing practice in the industry,

creating adverse impacts on consumer cardholders and rai-

sing issues of concern to state legislatures. The First Circuit’s

expansive interpretation of § 521, based neither on its lan-

guage nor its legislative history, allowing the exportation of

penalty fees from deregulated states, will injure consumers

in two ways. First, there is the direct injury to consumers

that results from the imposition of penalty fees by banks

chartered in deregulated states — fees which cost consumers

over $1 billion per year. In addition, there is the secondary

injury that results from the erosion of consumer protection

statutes in currently regulated states around the country as

banks threaten to relocate their credit card operations to

deregulated states in order to obtain more favorable terms.

I. ALTHOUGH THE CREDIT CARD INDUSTRY IS

GROWING RAPIDLY AND IS EXTREMELY PROF-

ITABLE, THE MARKET IS LARGELY NON-COM-

PETITIVE ON INTEREST RATES AND PENALTY

FEES, PROVIDING CONSUMERS WITH MINIMAL

INFORMATION AND LIMITED CHOICES.

The credit card industry grew at a phenomenal rate

in the decade of the 1980’s. In 1981, there was $31.8

7

billion in outstandings on bank credit cards in the United

States.* By 1990, that figure had grown to $180.5 billion,

an explosion in growth of over 560 percent. See Credit

Card Management, Card Industry Directory: The Blue Book

of the Credit and Debit Card Industry in the United States, at

26 (1992 ed). During that same time, the charge volume

on Visa credit cards went from $33.0 billion in 1981 to

$158.1 billion in 1990. Charge volume on Mastercards

increased from $26.1 billion in 1981 to $93.1 billion in

1990. Id., at 24. These increases represented an average

annual growth in Visa and Mastercard outstanding bal-

ances of 23 and 21 percent respectively. See Calem, “The

Strange Benavior of the Credit Card Market,” Federal

Reserve Bank of Philadelphia Business Review, at 6 (January /

February, 1992). In 1991, credit cards generated approx-

imately $34.24 billion in revenues for the banking indus-

try and $5.83 billion in pre-tax profits. The Nilson Report,

at 5 (Nov. 14, 1991).5

It is estimated that eight out of ten households in the

United States currently hold one or more credit cards.

The average household charged $885 per year at the

beginning of the 1980’s; by 1990, the average household

was charging approximately $3,753 per year. See “The Big

* The term “outstandings” refers to the amount of out-

standing debt on all credit card accounts of a particular issuer at

a given time. The term “charge volume” refers to the total dollar

amount of purchases and services charged to an issuer’s credit

card portfolio for a stated duration.

5 References to credit card profits in the banking industry

do not include the additional profits earned by non-bank issuers

of credit cards that have been entering the market in recent

months.

8

Squeeze” The Economist (Nov. 2, 1991). A typical card-

holder currently owes $2,350 on all of his credit cards. In

1980, that figure was only $350. Id. Approximately three-

quarters of cardholders are borrowers who pay high-

interest charges on a monthly basis (as opposed to conve-

nience users who pay in full each month). See Ausubel,

“The Failure of Competition in the Credit Card Market,”

The American Economic Review, at 71 (March, 1991).

This explosion in credit card growth has translated

into phenomenal profits for the banking industry. In 1991,

after-tax profits earned by the credit card operations of

banks issuing Mastercard and Visa credit cards were esti-

mated to be $3.5 billion. That figure was slightly lower

than the $4 billion in after-tax profits earned in 1990 and

the $4.11 billion earned in 1989. See The Nilson Report, at 1

(Nov. 14, 1991). These profits are significantly higher than

the ordinary rate of return in the banking industry as a

whole. In a 1991 article, Lawrence M. Ausubel, Professor

of Economics at Northwestern University, demonstrated

that banks issuing credit cards earned profits on their

card operations of three to five times the ordinary rate of

return in the banking industry. See Ausubel, “The Failure

of Competition in the Credit Card Market,” supra, at 50.

The Federal Reserve Board corroborated this finding in

September of 1991 in a report submitted to Congress and

predicted that credit card operations would continue to

earn high profits in the future. See Calem, “The Strange

Behavior of the Credit Card Market,” supra, at 7.

There are two primary reasons that credit card opera-

tions are so profitable for issuing banks. First, the annual

interest rates charged by most issuers are currently aver-

aging about five to six times the discount rate and federal

funds rate (the rates at which banks may borrow funds

9

from the Federal Reserve and from other banks, respec-

tively).© In 1991, of the top ten credit card issuers (mea-

sured by outstandings), which control over 50 percent of

the market, eight charged an annual interest rate of 19.8

percent, including Greenwood, and one charged an even

higher rate of 21.9 percent.” See Card Industry Directory,

supra, at 35, 37. The average interest rate among the top 25

card issuers, which control over 70 percent of the market,

was 18.9 percent in 1991; the average interest rate among

the top 250 issuers, which control over 90 percent of the

market, was 17.79 percent for that same period. Id. This

means that most banks in the credit card market, includ-

ing all of the major banks, are currently collecting interest

from consumers at more than five times the rate at which

the banks are able to borrow funds. Id. See also “Pushing

Plastic Is Still One Juicy Game,” Business Week, at 76

(Sept. 21, 1992).

The second reason credit card operations are so prof-

itable is that the industry is generally non-competitive on

interest rates and other pricing terms (including penalty

fees), providing consumers with minimal information

and limited choices. In “The Failure of Competition in the

Credit Card Market,” supra, Ausubel analyzed the cost of

funds to issuing banks for the period of 1982 to 1989 and

6 Since July 2, 1992, the Federal Reserve discount rate in the

Ninth District has been 3.0 percent; the federal funds rate for the

week ending November 27, 1992 was 3.10 percent. Although

some card issuers have lowered interest rates in recent months

for “preferred” or “premier” cardholders, most interest rates

remain in the 17 to 20 percent range.

7 The other bank is the American Express Centurion Bank,

which requires customers to pay their balance in full each

month. :

ud

10

compared it to interest rates during the same period. He

concluded that despite several fluctuations and a general

decrease in the cost of funds, “[c]redit card interest rates

were highly sticky during the period 1982-1989 and, in

fact, were virtually constant.” Ausubel, at 53.® Rejecting

the argument that this phenomenon was attributable to

an increase in the industry’s rate of bad loans, Ausubel

documented that during this same period credit card

profits rose dramatically. Id., at 57. The only explanation

for the coexistence of these two market phenomena -

price “stickiness” and substantial profitability — is that

the competitive model of market behavior has failed in

the credit card industry, leaving the industry almost

entirely non-competitive on fundamental pricing terms

such as interest rates and other fees. See generally Aus-

ubel, supra. As another economist recently observed,

Despite the large number of card issuers and the

ease of entry into the industry, the performance

of the bank card industry diverges from the

textbook model of a competitive market. Profits

have been unusually high, credit card interest

rates, on average, do not move in tandem with

banks’ costs of funds, and card issuers engage in

a significant amount of nonprice competition.

Calem, “The Strange Behavior of the Credit

Card Market,” supra, at 7.

Although credit card issuers do compete, they do so

by offering and advertising non-pricing frills and bene-

fits, rather than lower interest rates and fees. “In contrast

to the textbook model of competition, bank card issuers

vie for customers by means other than competing on

8 The concept of “stickiness” means that the factor

observed, interest rates, did not move in tandem with other

factors as it should have.

ae

11

interest rates. These firms actively engage in nonprice

competition, which takes the form of widespread advertis-

ing and offers of special services or benefits to card-

holders.” Calem, supra, at 9 (emphasis in original).9

Because there is little divergence among card issuers on

interest rates and penalty fees, consumers find it difficult

to make informed choices about their credit cards based

on these pricing terms. Banks do not advertise penalty

fees in their marketing, making it difficult for consumers

to find out about penalty fee terms. Moreover, because

most consumers do not intend to make late payments or

exceed their credit limits at the time they accept a credit

card, they do not compare terms or choose a credit card

on that basis. Finally, because many consumers carry a

sizeable outstanding balance on their card accounts from

month to month, it can be difficult for these consumers to

switch from one credit card issuer to another after they

discover that their card issuer imposes unfair penalty

fees.1° These factors combine to leave consumers largely

at the mercy of their credit card issuers.

Il. PENALTY FEES ARE A PROFIT-MAKING MECH-

ANISM THAT CAUSES CONSUMERS SUBSTAN-

TIAL INJURY.

In a climate of extraordinary profitability and non-

competitive pricing terms, penalty fees have become yet

° For example, many card-issuing banks have recently

teamed up with major airlines to offer credit cards through

which consumers can earn “mileage credits” that can be used

for future flights, discount fares, or upgraded seating. General

Motors recently launched its own credit card into the market

offering consumers a rebate on any future car purchase based

on total charges on the GM card.

10 Approximately 75 percent of cardholders carry an out-

standing balance from month to month. See Ausbul, supra, at 71.

12

another way for banks to extract profits from consumers.

According to surveys published last year, over 65 percent

of banks now charge late fees. That percentage is up from

50 percent in 1987 and 56.3 percent in 1988. A growing

number of banks also now charge overlimit fees. The

percentage of banks charging an overlimit fee increased

from 32 percent in 1987 to 42 percent in 1988, and to 50

percent in 1989. See Stewart, “How Penalty Fees Are

Rewarding Banks,” Credit Card Management, at 39-40

(Nov., 1991). Similarly, the amount of the charges

imposed has increased sharply in recent years. The aver-

age late fee for a regular Visa card shot up 22 percent,

from $6.56 in 1987 to $8.03 in 1989. The average overlimit

charge at the end of 1989 was $11. Id. The late fee charged

by Greenwood, the second largest card issuer in the coun-

try, is $10. The penalty fees currently charged on regular

accounts by Citibank, the largest card issuer in the coun-

try, are $15 for a late payment and $10 for an overlimit

charge.

Banks have been steadily increasing their penalty

fees because they are profitable. In 1991, banks issuing

Visa and Mastercards collected an estimated $1.16 billion

in penalty fees (late, overlimit fees and bounced check).

The Nilson Report, at 5 (Nov. 11, 1991). This represented

approximately three percent of the banks’ total credit

card revenues of $34.24 billion, and an increase in penalty

fees of approximately 15 percent over 1990. Id. Penalty

fees provide significant revenue, not just cost reimburse-

ment, to issuing banks. See Stewart, “How Penalty Fees

are Rewarding Banks,” supra, at 39-43. In this article, the

author notes that penalty fees “represent a significant

revenue opportunity” that can provide revenue well in

13

excess of extra costs incurred as a result of late payments

or overlimit activity.

Some issuers argue they make the charges to

cover extra costs incurred. But Auriemma Con-

sulting Group Inc. looked at a broad range of

nuisance fees — tariffs for card replacement and

extra copies of statements as well as late pay-

ment, bounced checks and exceeding credit

limits - and concluded they account for at least

60 basis points of the average bank card return

on assets, up from around 30 points a few years

ago.

Id.

Class action consumer litigation filed against credit

card issuing banks in California has confirmed that bank

penalty fees are generally set to exceed substantially their

costs. In Beasley v. Wells Fargo Bank, N.A., supra, 1

Cal.Rptr. 2d, at 446, an action brought under California

law, after a full trial on the merits a jury awarded the

statewide plaintiff class more than $5.2 million as dam-

ages for charges the bank had collected in late and over-

limit fees in excess of the banks’ costs incurred to collect

and account for late payments and overlimit balances."

Similar cases against Crocker National Bank and Security

1! California law requires that penalty fees, which are

essentially liquidated damages by virtue of the language in

standard form credit card agreements, be reasonably related to

the costs a bank actually incurs in collecting and accounting for

late payment or overlimit balances. See e.g. California Civil

Code § 1617(c) and (d); Garrett v. Coast & Southern Fed. Sav. &

Loan Assn. supra, 9 Cal.3d, at 731.

a

14

Pacific National Bank resulted in settlements of $3.8 mil-

lion and $2.6 million, respectively, for the statewide

plaintiff classes.12 Thus, while banks may defend their

penalty fees by citing higher costs incurred directly in

collection activity resulting from breach, real scrutiny

reveals that, in fact, the fees charged and collected are

generally far in excess of the banks’ costs and are used,

not to compensate for costs resulting from cardholder

breach, but to provide an additional source of revenue

and profit. See Beasley v. Wells Fargo Bank, supra, 1

Cal.Rptr.2d, at 448, 452.

While penalty fees simply represent more profits for

banks, they represent a significant financial injury for

consumers. Last year, penalty fees cost consumers over $1

billion. Considering that consumers are already paying

substantial interest charges on delinquent and overlimit

balances, an additional penalty fee of $10 or $15 is both

unnecessary and oppressive. This is especially true given

that consumers generally incur penalty fees as a result of

circumstances beyond their control. An article reported

earlier this year that one consumer in Pennsylvania, who

is currently suing Citibank over its late fees, fell behind

in her payments as a result of job change. Within only a

few months, she had incurred more than $60.00 in late

fees on her $2000 balance; these fees were in addition to

the interest charges of approximately $30.00 per month

she was already paying. See “Mad As Hell About Late

12 Kovitz, et al. v. Crocker National Bank, et al. (superior Court

of San Francisco Case No. 868914); McClendon v. Security Pacific

National Bank (Superior Court of Alameda County Case No.

613722-5).

: —

15

Fees,” Business Week, at 32 (Feb. 24, 1992). Because con-

sumers can unwittingly find themselves in these situa-

tions and suffer significant financial injury, it is important

that consumers be entitled to the protection of their own

elected state representatives and that states be able to

enforce consumer protection legislation limiting excessive

penalty fees.

Ill. THE EXPANSIVE INTERPRETATION OF § 521 OF

DIDA ADOPTED BY THE FIRST CIRCUIT

INJURES CONSUMERS BY ALLOWING SMALL,

DEREGULATED STATES SUCH AS DELAWARE

TO SET CREDIT TERMS FOR CONSUMERS

THROUGHOUT THE NATION AND BY CREAT-

ING PRESSURE ON OTHER STATES TO AVOID

OR TO REPEAL CONSUMER PROTECTION LEG-

ISLATION.

The First Circuit held that the meaning of the term

“interest” in § 521, and its preemptive scope, was to be

determined by looking to state law constructions of the

term, specifically the construction of the term “interest”

in Delaware law, the state in which respondent Green-

wood is chartered. This conclusion renders the term

“interest” in § 521 essentially meaningless. Moreover,

because of the concentration of the market within certain

mega-banks, located in deregulated states, it effectively

allows these states to expand the scope of preemption in

§ 521 well beyond the expressed intention of Congress

and to define allowable credit terms for the rest of the

nation.

Certain deregulated states dominate the credit card

industry. The ten largest issuers of credit cards in this

country control over 53 percent of the market. Six of these

issuers are located in Delaware; the largest issuer is

16

located in South Dakota (Citibank). See Card Industry

Directory, supra, at 35. These two states have undertaken a

deliberate strategy to attract large credit card operations

by creating an extremely favorable regulatory environ-

ment. See “Small States Teach a Big Banking Lesson,”

Chicago Fed. Letter (June, 1986). From 1980 to 1987, credit

card loans from commercial banks increased by $72.4

billion; banks located in Delaware and South Dakota

accounted for over half of that increase. Id. In order to

achieve this result, in the early .1980’s, the two states

repealed consumer protection legislation applicable to

consumer credit card lending, passed laws favorable, to

banking interests, including laws allowing various non-

interest fees, and undertook an aggressive campaign to

entice credit card operations to relocate from other states.

Id. The huge increase in credit card loans from these

states in the following years demonstrates the success of

the strategy.

If, as the Court of Appeals held below, the term

“interest rate” in § 521 has no meaning other than how

the home state defines it, and if all charges defined by the

home state as “interest” may be exported to consumers in

other states, obviously deregulated states such as Dela-

ware and South Dakota will define any number of differ-

ent charges as in the nature of “interest” on a loan. If the

decision of the Court of Appeals is allowed to stand,

credit card issuers located in these states can then invoke

the protection of § 521 and export a variety of penalty

fees, as well as other non-interest charges such as annual

fees, to all other states in which they issue credit cards.

This effectively allows certain small, sparsely-populated,

deregulated states to set credit card terms for the entire

nation. If Congress did not intend in enacting § 521 to

17

establish national consumer credit standards, surely Con-

gress could not have intended that the statute operate to

allow Delaware to define national standards (or lack

thereof) for credit card lending. The states of Delaware

and South Dakota have made a conscious choice to subor-

dinate consumer interests to the development of banking

enterprises; they should not be allowed to make this same

choice for all consumers residing in the other 48 states.

Nor should Delaware and South Dakota be able to pre-

empt the economic and policy decisions made in this area

by other state legislatures. '*

13 It is well-established that regulation of lending practices

for the protection of consumers is a historically-recognized

power of the states. See e.g. Lewis v. BT Investment Managers, Inc.,

447 U.S. 27, 38 (1980); Perdue v. Crocker National Bank, 38 Cal.3d

913, 937, 702 P.2d 503 (Cal. 1985), appeal dismissed 475 U.S. 1001

(1986). As this Court emphasized only last term, the scope of

Congressional intent to preempt such areas must be narrowly

construed. Cippollone v. Ligget Group, Inc., ___ U.S. __, 112 S.Ct.

2608, 2617 (1992). “[T]he historic police powers of the States are

not to be superseded by . . . [the] Federal Act unless that is che

clear and manifest purpose of Congress.” Id., at 2617.

Another recent decision of this Court addressing the pre-

emptive scope of the Employees Retirement Income Security

Act, 29 U.S.C. § 1001, et seq. (“ERISA”), stands in stark contrast

to the expansive interpretation of § 521 adopted by the Court of

Appeals below. In Massachusetts v. Morash, 490 U.S. 107, 109

S.Ct. 1669 (1989), this court unanimously held that ERISA did

not preempt a Massachusetts criminal statute requiring

employers to pay employees for unused vacation time.

Although ERISA has much broader preemptive language than

§ 521 of DIDA, preempting “any and all state laws insofar as

they .. . relate to any employee benefit plan,” 29 U.S.C. § 1144(a)

(emphasis added), this Court declined to find preemption of the

Massachusetts statute enacted for the protection of employees.

;

18

The interpretation of § 521 of DIDA adopted by the

First Circuit further injures consumers by creating sub-

stantial pressure on states such as Massachusetts to

deregulate its own consumer credit industry. This pres-

sure arises because the interpretation of the Court of

Appeals below would give banks chartered in deregu-

lated states a financial advantage in other states over local

banks. This disadvantages local banks in states that have

consumer protection legislation to the significant advan-

tage of the huge dominant national lenders located in

deregulated states. The result is a chain reaction “race to

the bottom.” Banks claim they are not earning enough

profit and threaten to leave states with consumer protec-

tion legislation, state legislators become concerned about

losing jobs and revenues, and the legislation is repealed.

This pressure on states to repeal their consumer pro-

tection legislation caused by deregulation in other states

was explained in a publication of the Federal Reserve

Bank of Chicago in June 1986. The publication reported

that, “after the successes in South Dakota and Delaware,

other states, including those in the Seventh District,

found it necessary to play follow-the-leader. Some of the

banks in these states were either moving their credit card

operations to South Dakota or Delaware or were threaten-

ing to do so.” Id. The report notes that Illinois was forced

The States have traditionally regulated the payment

of wages, including vacation pay. Absent any indica-

tion that Congress intended such far-reaching conse-

quences, we are reluctant to so significantly interfere

with the “separate spheres of governmental authority

preserved in a federalist system.”

Id., at 1675, quoting Fort Halifax Packing Co. v. Cayne,

482 U.S. 1, 19 (1987).

19

to eliminate its interest rate ceilings on credit cards in

1981; Indiana had to lift its usury ceilings in 1981 and

again in 1982; and Iowa eliminated its interest rate cap

and limits on annual fees in 1984 after one major bank

threatened to leave. Id. lowa raised its limits on late fees

under similar circumstances in 1989. Louisiana and Geor-

gia lifted ali restrictions on credit card lending in 1987,

hoping to attract more jobs in the banking industry. See

“Group Advocates State Regulation of Credit Cards,”

American Banker, p. 3 (July 29, 1987). The decision of the

First Circuit allowing exportation of penalty fees, as well

as interest rates, will only increase this pressure to dereg-

ulate. Indeed, recently, the pressure to deregulate has

focused particularly on late fees. According to a recent

report in Business Week, “[o]n February 3 [1992], Chemical

Bank persuaded New York legislators to eliminate the

state’s 10-day waiting period before banks can begin

charging late fees. Lawmakers apparently feared that

Chemical might move the Long Island card-processing

operation of its merger partner, Manufacturers Hanover

Co., to Delaware.” See “Mad As Hell About Late Fees,”

supra, at 32.

In contrast, if this Court reverses the decision of the

Court of Appeals, and limits the preemptive scope of

§ 521 to its expressed intent to preempt interest rates, this

would eliminate the pressure on states to deregulate pen-

alty fees. As Congress intended, banks issuing credit

cards would remain subject to the consumer protection

laws of the states in which the cardholders reside and

would not be able to avoid restrictions on excessive pen-

alty fees by relocating to a deregulated state. States

would then be able to enforce their prohibitions against

20

excessive fees, whether imposed by in-state or out-of-

State issuers, without fearing defections by local banks.

°

CONCLUSION

For all the foregoing reasons, amici Consumers Union

and Consumer Action urge this Court to grant the peti-

tion for a writ of certiorari filed by Massachusetts.

DATED: December 4, 1992

Respectfully submitted,

James C. STURDEVANT

Kim E. Carp

STURDEVANT & STURDEVANT

A Professional Corporation

By: James C. STURDEVANT

Attorneys for Amici Curiae

Consumer Action and

Consumers Union