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High Court Allows New 'Late Fees' on Credit Cards : Law: The Supreme Court decision gives banks more leeway in imposing fines on card holders who fail to pay on time.


WASHINGTON — Credit card users who fail to make their monthly payments on time may face new "late fees" following a Supreme Court decision Monday that invalidates some state consumer protection laws.

The justices let stand a ruling by a U.S. appeals court in Boston that said federal banking law preempts a Massachusetts law that bars any bank, including out-of-state companies, from charging late fees to its residents.

For Californians, the effect of Monday's decision appears to depend on whether their credit cards are issued by a bank based in California or elsewhere. If the card is issued by a California bank, late charges must be reasonable under state law. They are usually limited to $3 to $5.

However, if the card is issued by a firm located in a state that permits such fees, that bank can now charge higher fees and ignore California's consumer protection laws.

In the case that reached the high court, Greenwood Trust Co., a Delaware-based bank that issues the popular Discover card, charges its customers $10 if they fail to make a minimum payment within 20 days of the due date.

Massachusetts and five other states forbid such charges. Twenty-six other states, including California, limit such charges through regulation.

By contrast, tiny Delaware permits banks to charge a variety of fees.

South Dakota has similarly lenient laws, which helped it attract Citibank, the nation's largest card issuer.

In 1980, Congress enacted a new banking law which prohibits states from imposing their own limits on "interest" rates charged by out-of-state lenders.

And in August, the appeals court in Boston ruled that late fees are akin to an interest rate, and therefore, are preempted.

"Federal law has the right of way in this area," wrote Judge Bruce Selya.

That decision surprised state officials, who believed that they had broad authority over banking and consumer protection.

Lawyers for 32 states, joined by consumer advocates, urged the high court to hear the case of Massachusetts vs. Greenwood Trust, 92-794, and to reverse the ruling.

"If not reversed, the ruling below will permit a few small states that have chosen to cater to the banking interests to deregulate the industry on a national basis," said San Francisco attorney James C. Sturdevant on behalf of Consumers Union.

But the high court dismissed the appeal without comment or dissent.

An attorney representing the Bankcard Holders of America said the decision will probably encourage more banks to charge new fees.

"It means they will begin charging delinquency fees all over the country, regardless of state laws," said Michael P. Malakoff, a Pittsburgh lawyer.

During the 1980s, the credit card industry grew at a phenomenal rate.

The charge volume on Visa credit cards rose from $33 billion in 1981 to $158 billion in 1990.

During the same period, charges on Mastercards rose from $26 billion to $93 billion.

Despite advice from money managers, nearly three-fourths of card holders carry over a monthly balance and thereby pay high interest charges.

The high court was also told that about two-thirds of card issuers charge late fees, which are usually mentioned in the fine print that accompanies the card.

Greg Wilhelm, director of government relations for the California Bankers Assn., said the decision appears to put California banks "at a competitive disadvantage."

"Citibank can come in and charge $10 or $15 or whatever they want, while California banks must meet a more stringent standard," Wilhelm said.

Times staff writer Denise Gellene in Los Angeles contributed to this story.

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