Household Credit Services

MGMT520 AUGUST 11, 2017

Week 6 Case Analysis

Parties
Plaintiffs
Sharon Pfenning

Defendant
Household Credit Service, Inc.
 Facts
Sharon Pfenning (plaintiff) was the holder of a credit card issued by Household Credit
Services, Inc. (Household) (defendant).
Pfenning had a credit limit on her credit card of $2,000. However, Pfenning was able to
exceed the $2,000 cap, subject to a $29 over-limit fee for each month she surpassed the
allowable limit.
Household billed Pfenning according to a regular billing cycle. When Pfenning
exceeded the $2,000 limit during a specific billing cycle, Household added the $29 over-
limit fee to her billing statement. However, Household did not list the over-limit fee as a
finance charge.
Pfenning sued Household in district court, alleging that by failing to include the over-limit
fee as a finance charge, Household was misrepresenting the true cost of the credit in
violation of the Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq.
Household moved to dismiss the complaint, arguing that fees for exceeding a credit
limit were specifically excluded from the definition of finance charges by the Federal
Reserve Board (Board) in Regulation Z, 12 C.F.R. 226.4(c)(2).
The district court agreed with Households argument and granted the motion to dismiss.
Pfenning appealed, and The Sixth Circuit Court of Appeals reversed the district Court
decision
 Procedure
On August 24, 1999, respondent fled a complaint in the United States District Court for the
Southern district of Ohio on behalf of a purported nationwide class of all consumers who
were charged or assessed over-limit Fees by petitioners
Pfenning alleged in her complaint that Household allowed her and each of the other
putative class members to exceed their credit limits, thereby subjecting them to over-limit
Fees. According to Pfenning, Household violated TiLA, by failing to classify the over-limit
fees as finance charges and thereby misrepresented the true cost of credit to
respondent and the other class members.
Petitioners moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure
12(b)(6) on the ground that Regulation Z specifically excludes over-limit fees from the
definition of finance charge. The District Court agreed and granted petitioners motion
to dismiss
On appeal, respondent argued, and the Court of Appeals agreed, that Regulation Zs
explicit exclusion of over-limit fees from the definition of finance charge conflicts with
the plain language of 15 U.S.C. 1605(a).
The Court of Appeals first noted that, as a remedial statute, TiLA must be liberally
interpreted in favor of consumers. The Court of Appeals then concluded that the over-
limit fees in this case were imposed incident to the extension of credit and therefore fell
squarely within 1605s definition of finance charge.
Issues

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?
 Explanation of Applicable Laws
Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq.
This Act (Title I of the Consumer Credit Protection Act) authorizes the Commission to enforce compliance by most non-
depository entities with a variety of statutory provisions

Regulation Z, 12 C.F.R. 226.4(c)(2).

The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the
extension of credit.

1605 Determination of finance charge:

Except as otherwise provided in this section, the amount of the finance charge in connection with any consumer credit
transaction shall be determined as the sum of all charges, 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

1604: Disclosure guidelines

The Bureau shall prescribe regulations to carry out the purposes of this subchapter. Except with respect to the provisions of
section1639 of this title that apply to a mortgage referred to in section 1602(aa) of this title, such regulations may contain
such additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments
and exceptions for all or any class of transactions, as in the judgment of the Bureau are necessary or proper to effectuate
the purposes of this subchapter, to prevent circumvention or evasion thereof, or to facilitate compliance therewith 1602
Definitions and rules of construction

1640. Civil liability

Individual or class action for damages; amount of award; factors determining amount of award Except as otherwise
provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any
requirement under section 1635 of this title, subsection (f) or (g) ofsectionn 1641 of this title

15 USCS 1637: Open end consumer credit plans

Before opening any account under an open end consumer credit plan, the creditor shall disclose to the person to whom
credit is to be extended a list of different items :the conditions under which a finance charge may be imposed, the
method of determining the balance upon which a finance charge will be imposed, the method of determining the
amount of the finance charge, including any minimum or fixed amount imposed as a finance charge.
 Holding

the Supreme Court having held that the applicable section of Regulation Z is not an
unreasonable interpretation of 1605
The Supreme Court reversed the court of appeals and ruled in favor of Household.
 Reasoning
The respondent does not challenge the Board's authority under 1604(a) to issue binding regulations, this Court faces
only two questions. It asks, first, whether "Congress has directly spoken to the precise question at issue," Chevron U.S.A.
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842, 81 L. Ed. 2d 694, 104 S. Ct. 2778, *456 in which case
courts, as well as the Board, "must give effect to the unambiguously expressed intent of Congress," id., at 842-843, 81
L. Ed. 2d 694, 104 S. Ct. 2778 However, whenever Congress has "explicitly left a gap for the [implementing] agency to
fill," the agency's regulation is "given controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the
statute." Id., at 843-844, 81 L. Ed. 2d 694, 104 S. Ct. 2778.
TILA itself does not explicitly address whether over-limit fees are included within the "finance charge" definition. The
Sixth Circuit did not attempt to clarify the scope of 1604(a) 's critical term "incident to the extension of credit."
Because the phrase "incident to" does not make clear whether a substantial (as opposed to a remote) connection is
required between an antecedent and its object. it cannot be concluded that the term "finance charge," standing
alone, unambiguously includes over-limit fees. Moreover, an examination of TILA's related provisions, as well as the full
text of 1605 itself, casts doubt on the Sixth Circuit's interpretation.
The Board has authority to adopt a categorical approach excluding all OCL fees from the finance charge even if
some OCL fees are imposed incident to the extension of credit. TiLA authorizes the Board to make "such
classifications, differentiations, or other provisions, and provide for such adjustments and exceptions for any class of
transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of TiLA, to prevent
circumvention or evasion thereof, or to facilitate compliance therewith." 15 U.S.C. 1604(a) Pursuant to that authority,
the Board's regulation treats all OCL fees in the same manner and excludes all of them from the finance charge. That
classification is rational and not repugnant to TILA, even if one assumes that some OCL fees fall within the definition of
a finance charge.
The court of appeals' other reason for invalidating the Board's rule also lacks merit. The court classified TILA as "a
remedial statute" and purported to give it "a liberal interpretation in favor of consumers in order to protect them in
credit transactions." Pet. App. A8-A9; see id. at A11-A12. By making its own policy judgment about what would best
protect consumers, the court usurped the role that Congress has given to the Board of "striking the appropriate
balance" between "complete disclosure" and "informational overload."
 Outside Research
The credit card industry is big business, and it is dominated by a handful of companies
American consumers collectively are approaching $1 trillion in credit card debt in mid-
2016, according to the Federal Reserve consumer credit report
There were some 14.5 billion U.S. general purpose credit card transactions in the first six
months of 2015, accounting for more than $1.4 trillion in purchase volume
The card lending industry in the U.S. is extremely consolidated, with the four largest
issuers garnering a market share of 60% at the end of 2016: JP MORGAN, CiTiGROUP,
CAPITAL ONE, BANK OF AMERICA
Visa is by far the biggest credit card brand in the U.S., owning more than half of the
market. At the end of last year, more than a quarter of all U.S. payment cards 26
percent were Visa credit cards and an even greater share 29.2 percent were Visa
debit cards. In contrast, MasterCards total share was 26 percent.
First Data is the biggest acquirer. First Data has clearly benefitted from the dissolution of
the old Paymentech, of which it was part owner, having grown its processing volume
by 137 percent in the period
GE is the biggest store card issuer with $54 billions
China UnionPay has become the biggest global card issuer. By 2011, UnionPay had
issued 2.95 billion cards, compared to 2.35 billion for Visa, up from 1.3 billion and 1.71,
respectively, in 2006
 Conclusion
I do agree with the decision of the Supreme Court, because under the TiLA lenders must
disclose to their customers all "FINANCE CHARGES to be paid. A fee imposed when the
customer exceeds its authorized balance, it is not a FINANCE CHARGE and need not to
be disclosed.
The supreme Court concluded that over-limit fees can better be characterized as penalties
for the customer defaulting on the credit agreement.
The Supreme Court reversed the court of appeals and ruled in favor of Household.
 Citations
Household Credit Service, Inc v Pfenning (n.d) retrieved August 11 2017 from https://www.oyez.org/cases/2003/02-857

Fall 2004-08 over-limit fees are not finance charges (n.d) retrieved August 11 2017 from http://www.gaclaw.com/News-Publications/Archived-News-
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Household Credit Service,Inc v Pfenning AMICUS (MERITS) (n.d) retrieved August 11 2017 from https://www.justice.gov/osg/brief/household-credit-
services-v-pfennig-amicus-merits

Household Credit Service, Inc v Pfenning (n.d) retrieved August 11 2017 from https://www.law.cornell.edu/supct/html/02-857.ZO.html

1605. Determination of finance charge (n.d) retrieved August 11 2017 from https://www.law.cornell.edu/uscode/text/15/1605

Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq.(n.d) retrieved August 11 2017 from https://www.ftc.gov/enforcement/statutes/truth-lending-act

Regulation Z, 12 C.F.R. 226.4(c)(2). (n.d) retrieved August 11 2017 from https://www.law.cornell.edu/cfr/text/12/226.4

1605: Determination of finance charge (n.d) retrieved August 11 2017 from https://www.law.cornell.edu/uscode/text/15/1605

1604: Disclosure guidelines (n.d) retrieved August 11 2017 from https://www.law.cornell.edu/uscode/text/15/1604

1640. Civil liability (n.d) retrieved August 11 2017 from https://www.law.cornell.edu/uscode/text/15/1640

15 USCS 1637: Open end consumer credit plans (n.d) retrieved August 11 2017 from https://www.law.cornell.edu/uscode/text/15/1637

HOUSEHOLD CREDIT SERVICES, INC. and MBNA AMERICA BANK, N. A.,Petitioners v. SHARON R. PFENNIG (n.d) retrieved August 11 2017 from
http://www.lexisnexis.com.proxy.devry.edu:5050/lnacui2api/mungo/lexseestat.do?bct=A&risb=21_T26362956028&homeCsi=6320&A=0.596963865808855
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largest-card-issuers-now-hold-60-of-all-u-s-credit-card-debt/#fa72c3d2962c

Whos who in the Credit Card industry (n.d) retrieved August 11 2017 from http://blog.unibulmerchantservices.com/whos-who-in-the-u-s-credit-card-
industry/

Credit Card market share statistic (June 22 2016) retrieved August 11 2017 from http://www.creditcards.com/credit-card-news/market-share-
statistics.php