# Amicus Curiae Brief — Massachusetts v. Greenwood Trust Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1993
- **Citation:** 506 U.S. 1052

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1596%3A5. Public record. Not legal advice.