Household Credit Services v. Pfennig - Oral Argument
Transcript:
Argument of Seth P. Waxman
Chief Justice Rehnquist: We'll hear argument now in No. 02-857, Household Credit Services v. Sharon R. Pfennig.
Mr. Waxman.
Mr. Waxman: Mr. Chief Justice, and may it please the Court:
This case involves a regulation promulgated by the Federal Reserve Board to govern the disclosure of fees imposed for exceeding a credit limit.
It does not involve any challenge to the fees themselves or any contention that the fees were not disclosed.
Unquestionably they were.
This case concerns only how such fees should be characterized when they are disclosed.
Justice O'Connor: Would you enlighten us on just how this transaction gets authorized in the ordinary course of events and in this event?
Is there any special call made, or is the credit card just submitted to the store and the store processes it and if it's not rejected, it goes through?
What happens?
Mr. Waxman: Well, as the Solicitor General has explained in his brief for the Federal Reserve Board, ordinarily the arrangement between banks... that is, the banks that issue the cards and the banks that do the corresponding relationship with the merchants... have an agreement between the merchants and the banks where the merchant will be liable for fraudulent use of the card or the other unless it obtains authorization to process the charge.
And so in the ordinary practice, the board has explained, a merchant may or may not, is not required to, but may well call in the charge or submit the account number to the issuing bank via the correspondent bank and get an approval, yes or no, to process the charge.
Now, the board has explained that when the issuing bank authorizes the merchant to process the charge, that two important things don't happen.
One, it does not in any way represent a renegotiation between the consumer and the issuing bank, and it says nothing about the overall credit limit.
And two, the issuing bank often will have no idea whether the charge being authorized will or will not trigger a credit limit of the consumer for a variety of reasons, not the least of which is that, as the board explains, credits and payments aren't instantly reflected, merchants often don't put the true amount of the charge in.
They may, as hotels and... and rental car companies do... often block very large amounts because they don't know what the ultimate charge will be.
And there is also a recognition in the industry, the board explains, of a certain tolerance.
That is, the merchant... the credit card company won't always want to cut somebody off whenever it has a suspicion that they may have hit their credit limit because the merchant has a relationship with the customer.
And since the system of information is so imperfect, the issuing bank also has a relationship with its consumer and doesn't want to embarrass the consumer.
So the short answer to that... the short version of the very long answer is in the ordinary course, merchants have an incentive to seek authorization, but they're not required to, and the authorization that's given doesn't reflect knowledge by the issuer that a credit limit will be exceeded.
Justice Stevens: But, Mr. Waxman, is it not true that there are many occasions on which the credit limit will, in fact, be exceeded and there will, nevertheless, come back an approval, and that the customer in those cases may or may not know that his... that, A, his limit was exceeded, and B, that he's going to be charged for it?
Mr. Waxman: Well, the creditor... the consumer may or may not know that his or her credit limit was exceeded, but of course, that information is entirely within the knowledge of the... the potential knowledge of the consumer because the consumer does know what or... what charges he or she has made and what payments he or she has made.
Justice Stevens: Well, not necessarily.
You can have a card owned by two or three people in the same family and maybe the husband spent some money that the wife didn't know about while this was going on.
So it's at least possible that they would exceed the credit limit without the credit cardholder knowing it, their not being aware of it, not keeping track of it.
Mr. Waxman: Well, the...
Justice Stevens: And... and I'm just asking you, is it not true that it is possible that he will receive an affirmative answer to using the card without knowing whether or not he exceeded the limit and therefore is going to be... be charged for it?
Mr. Waxman: It's possible either because he doesn't keep good track or he doesn't... he's not accurate or he's allowed a child or a spouse to use the card and isn't keeping track or control of that.
But one thing that you said, Your Honor, that is not true is the issuing... the credit card issuer is not giving permission directly to the consumer to do anything, and most particularly if...
Justice Stevens: Well, but I'm not sure that's right.
If the... if the credit card issuer is informed of the overcharge, that it's over the limit, and decides this is a good customer, well, let's not charge him for it or let's okay it anyway, he gives that information to the merchant and the merchant may not tell the customer anything about it.
Mr. Waxman: The merchant...
Justice Stevens: Isn't that true?
Mr. Waxman: The merchant won't know.
The merchant isn't going to tell the customer anything.
Justice Scalia: No.
Mr. Waxman: And the credit card issuer may not know.
Justice Kennedy: But he may know.
Mr. Waxman: But you're positing...
Justice Stevens: That's my point.
Mr. Waxman: Yes.
Justice Stevens: The credit company may know and he will not pass that information on to the consumer.
Mr. Waxman: There is a credit... there is an agreement that must be accepted...
Justice Stevens: Well, am I correct on my facts?
Mr. Waxman: You're...
Justice Scalia: Is it not possible?
Mr. Waxman: You are correct that it is possible that the consumer won't realize it and the issuer may know.
And in that instance, the issuer, which has no relationship directly with the consumer, doesn't tell the merchant to tell the consumer.
Justice Kennedy: Correct.
Mr. Waxman: But, Justice Stevens...
Justice Stevens: And so the consumer may end up paying a charge that he didn't realize he'd incurred.
Mr. Waxman: Well, the...
Justice Stevens: Is that correct or not?
Mr. Waxman: That is only partially correct.
It's correct factually given the hypothetical that you've articulated.
It's incorrect legally because the credit agreement... it must...
Justice Stevens: If he has... if he knows two things.
He knows the fine print on the credit agreement and, two, he knows the status of his balance.
Mr. Waxman: I...
Justice Stevens: But if he doesn't have either of those in mind, it could occur... it could occur that he would run an overcharge and be charged $15 or $20 or whatever it is without realizing he's incurred the charge.
Mr. Waxman: It is true with the following caveats.
I'm not trying to fight the hypothetical.
I just want to make sure...
Justice Stevens: It seems to me you're unwilling to give me a categorical yes answer when the answer is yes.
Mr. Waxman: And I can't, and here's why, Justice Stevens.
I... I mean no disrespect.
But many, many credit card issuers do not imply an over-limit fee on a transactional basis.
They apply it, for example, if at the end of the month the balance exceeds the limit as opposed to whether a particular transaction sort of spikes it over the limit one time.
And so I'm just trying to be completely accurate.
Now, the term... I think it's very important...
Justice Stevens: Well, you've given me lots of examples where the charge would not be incurred.
I'm merely trying to get you to acknowledge there will be some cases in which a person who is not fully familiar with the... with the balance in his account doesn't realize he's gone over the amount and is being charged for an extra credit charge.
Mr. Waxman: I think that must... there must be instances in which that is true.
But the term, credit limit, Your Honor, is a term of art that is recognized in the industry, that is reflected in the Federal Reserve Board regulations, and it draws an important distinction between increasing a credit limit, an established credit limit, upon an application and authorizing a point-of-sale transaction.
Chief Justice Rehnquist: Well, now, Mr. Waxman, exactly what happens when a point-of-sale transaction is authorized?
The merchant is then off the hook?
Mr. Waxman: The merchant has a safe harbor, Your Honor.
The merchant is told, if you pay this charge and it turns out not to be collectible for any reason, we will hold you harmless.
And that's the reason that this business... contractual relationship is established between issuers and merchants, as a way to encourage merchants to allow use of the card.
Now...
Justice Souter: Mr. Waxman, is... I'm sorry.
Mr. Waxman: No.
Justice Souter: Is the... is the event of exceeding the... the limit defined in these agreements characteristically as an event that can occur at any time during the billing period, or is it an event that is defined as... as occurring only at the end of the billing period when all the credits and... and all the debits are... are accounted for?
Mr. Waxman: My understanding, Justice Souter, is it varies depending on issuer and card, but that is, some... some cards will... all... all... well, there are some credit cards and charge cards that don't have limits, but when they have a limit, the limit is required to be explicated in the initial disclosures.
And in the solicitation, the disclosure, and all periodic statements, the lender, the credit card issuer, is required to identify the credit limit and specify that fees that are charged for exceeding a credit limit will be the following amount.
Justice Ginsburg: Mr. Waxman, will you explain what the consequence is?
It's... this is not a question of disclosure or not because either it will be part of the finance charge and disclosed as such or the... whatever you call OCL.
What difference does it make?
It's not notice.
If it goes... if it's part of the finance charge, how is the consumer benefitted?
Mr. Waxman: Well, I don't... I will explain what difference it makes.
No one has yet explained, neither the respondent in this case nor the Sixth Circuit, how the consumer is benefitted by the rule that she's advocating or the Sixth Circuit's rule, but here's how it works.
In the open-end credit relationship, the credit card or charge card relationship, there are three relevant events.
One is the solicitation or advertisement to invite someone to enter into a relationship.
That's called the solicitation.
The...
Chief Justice Rehnquist: Are you talking about solicitation for a purchase of a credit card or for purchase of merchandise?
Mr. Waxman: For a purchase of a credit card.
You get a letter in the mail saying buy a... open a Citibank card, and there are certain disclosures that are required in those solicitations.
If you send back something that says, yes, I want to have a... I want one of your credit cards, the act and the regulations require that certain disclosures be made at that point, and that's called the initial disclosure.
And then the third event is the periodic statement, when you get your statement every month or so.
Now, with respect to the solicitation and the initial disclosure, the consequences of calling this a finance charge or a component of the finance charge versus an other charge are zero.
That is, in both of those instances, the lender, the issuer, must disclose that there will be charges paid... fees assessed for exceeding a credit limit and how much it is.
And they're not characterized there as part of the finance charge or otherwise.
The... on the... those documents require a statement of what the APR, the annualized percentage rate, is, but the APR in those statements refers only to the periodic rate, the interest rate that's going to be charged to all... applied to all charges.
In the...
Justice Souter: That's the only thing it could occur to.
Mr. Waxman: Yes.
Chief Justice Rehnquist: Yes.
Mr. Waxman: Because you don't know whether there will be late charges or over-limit charges.
Justice Souter: Is... is it a consequence of... of the other position that they would somehow have to try to do the impossible?
Mr. Waxman: Not at those two stages, but at the third stage, that is, the periodic statement, when you get your bill every month, there is a difference there.
In both instances, there will be a specification of over-limit charge, but if the Sixth Circuit is right, in those instances in which the issuer actually knew that the charge it authorized the merchant to process resulted in the consequence of an over-limit charge, it would be called over-limit charge finance charge.
That is, there would be a line item that specifies what it is, just like any other charge or any other purchase or payment, and the amount.
But it would affect the annual percentage rate, what's called the historical annual percentage rate, in the periodic statement.
Justice Kennedy: Are there any other... other instances in the act where the APR, calculated retroactively on the monthly statement, is higher than what was the APR that was disclosed?
Mr. Waxman: Yes, there... yes, there are, Justice Stevens, because there are certain types of charges that may or may not occur.
For example, if you use your card to get cash at the cash machine or something that will be... will... that are charged in the finance... that are part of the finance charge and will, therefore, affect the APR on the monthly statement, but won't be disclosed to the...
Justice Kennedy: So... so then the respondent's theory could... and that's consistent with the act, I take it.
So then respondent's theory could work.
My concern was that respondent's theory couldn't work because you had... couldn't hypothetically calculate an annual percentage rate not knowing whether charge would be made.
Mr. Waxman: Well...
Justice Kennedy: But if you can and... and do have an adjustment of the APR that's permitted under the act, on the disclosure statement, then her theory at least can work.
Mr. Waxman: Well, her... I'm not saying that her theory or the Sixth Circuit's rule couldn't work.
It would require a great deal of additional rulemaking by the Federal Reserve Board because the APR is a... is a fraction, is a percentage, the numerator of which is the component of all the individual charges and the denominator is something that, in the context of an over-limit fee, is unclear.
Does it apply to the transaction that it was applied to?
Is it the average monthly balance?
Is it for the whole month or part of the month?
It's not impossible.
But what it... what it is is directly contrary to the two objectives of TILA.
The purpose of TILA is to come up with bright line classifications that are readily complied with by issuers and that help consumers compare competing costs of credit.
That is manifest in Congress' purpose, and a rule that requires the treatment month to month, charge to charge depend on what the issuer knew at the time it authorized some charge that may later be determined to have triggered at... the... allowing the borrower to exceed the credit limit would cause these monthly APR's to vary widely and, it seems to me, can only create confusion and inability to say, well, gee, I just got an application or a... a thing in the mail from, you know, Citibank saying 17.3 percent, but I just looked at my statement and it's 79 percent.
Justice Ginsburg: Mr. Waxman, I don't think you finished the answer to the question I asked, and what I wanted to know is if it's labeled a finance charge, then there won't be interest on it; whereas, if it's treated as a debit like any purchase, then the interest would run on it in the future.
So could... it could be a difference for the consumer, could it not?
Mr. Waxman: Well, yes, in the month in which it has occurred because, with respect to the next month, whatever finance charge was applied and... and continues as a balance will also have applied to it the finance charge, that is, the interest rate that would apply.
So, but with... there is a consequence in the month in which it is applied; that is, for whatever days it's outstanding, up until the... the end of the... the card's grace period, a finance charge could be applied to that other charge.
Justice Ginsburg: So it could be... it could be...
Justice Kennedy: Why isn't it carried over from month to month?
In other words, I... I get a late... this... this special charge, but I just pay the minimum, so I'm really carrying part of the special charge over to the next month.
I pay interest on that too, I take it.
Mr. Waxman: These cards typically have a grace period in which you can pay off your balance and you don't have to pay any finance charge, but if you don't, whatever charges are carried forward, whether they derive from purchases or over-limit charges or late fee charges or... or finance charges in the previous month, something is charged against it.
May I reserve the balance of my time?
Argument of Barbara B. McDowell
Chief Justice Rehnquist: Very well, Mr. Waxman.
Ms. McDowell, we'll hear from you.
Mr. McDowell: Mr. Chief Justice, and may it please the Court:
Congress has given the Federal Reserve Board broad authority to implement the Truth in Lending Act.
The regulation at issue here is the permissible exercise of that authority.
The board has addressed the disclosure of fees for exceeding a credit limit with a clear bright line rule which requires all such fees to be disclosed clearly and conspicuously but separately from the finance charge and APR.
To use the Court's own terminology, that approach is neither obviously repugnant to the statute nor demonstrably irrational.
To the contrary, the rule is a sensible one that, in the view of the expert agency, provides meaningful disclosure to consumers and clear guidance to creditors.
There's no merit to the court of appeals' and respondent's contrary approach which would only impose exorbitant compliance costs on creditors without any meaningful benefit in terms of disclosure to consumers.
The board's rule is not foreclosed by the statutory text.
The act does not speak expressly to whether over-the-limit fees are or are not finance charges.
Nor is that question resolved by the act's generally phrased definition of finance charges as charges imposed as an incident to the extension of credit.
That phrase is ambiguous as to whether it encompasses charges that are imposed not as the cost of the credit that the creditor has contractually obligated itself to provide, but instead as a penalty for the consumer's obtaining some additional credit that she had no contractual right to obtain.
The board's rule is rational.
As the board recognized over-the-limit fees...
Justice O'Connor: Ms. McDowell?
Mr. McDowell: Yes.
Justice O'Connor: Would you... as I understand the respondent's brief, it asks us to draw a line between the over-the-limit fees that are imposed for acts of default and those that are imposed for extension of the credit limit and says that Regulation Z draws such a distinction.
Would you comment on that argument?
Mr. McDowell: That argument is incorrect, Your Honor.
The relevant provision of Regulation Z, which is at page 2 of the petitioners' brief, contains no limit of that sort.
It speaks of charges for actual unanticipated late payment for exceeding a credit limit and for delinquency, default, or similar occurrences.
It thus speaks in a categorical manner of charges for exceeding a credit limit.
It doesn't condition them on whether it was unanticipated or whether it's tantamount to a default.
The board has acknowledged that there are hypothetical situations at least in which a... a charge might be labeled an over-the-limit charge when it actually is not, when there actually, for example, is no contractual credit limit and... and a charge is simply, in that context, labeled inaccurately an over-the-limit fee.
However, when a charge is, in fact, imposed by the creditor as a consequence of the consumer's exceeding the contractual credit limit, it is validly within this regulation.
Justice Ginsburg: Was this an account that carried a finance charge?
Because the regulations describe something called charge card that doesn't have finance charge, but could have an over-the-limit charge.
Mr. McDowell: That's... the particular account at issue in this case was a credit card.
Justice Ginsburg: Which did have a finance charge, or you don't know?
Mr. McDowell: Yes, it does impose a periodic charge if charges that are run up during a particular month are not paid within the grace period.
Justice Stevens: If I understand the other side, they make kind of a plain language argument.
They... they talk to the merchant.
The merchant sends in... they want approve a $200 purchase and they get back, well, it'll go over the limit and is it okay.
And they say, yes, let them go over the limit, and so they've extended additional credit.
And... and they, if they're going to charge them $15 to do it, that would be a finance charge... I mean, that would be a charge for an extension of credit.
Why doesn't it fit the plain language?
Mr. McDowell: We don't disagree with you, Justice Stevens, that it is, at some general level, a charge imposed incident to the extension of credit.
There was necessarily an extension of credit here.
Justice O'Connor: In... in exchange for the higher credit limit, yes.
Mr. McDowell: The... but... but the term, incident to the extension of credit, is an ambiguous one.
The Court construed similar language in the Holly Farms case and recognized it to be ambiguous.
It doesn't address precisely the nature or... or the extent to which a particular charge has to be connected to an extension of credit.
And here, the board has reasonably viewed over-the-limit fees like late payment fees and other default fees as being imposed for a violation of the terms of the credit agreement rather than as...
Justice Stevens: And then the... but wouldn't the customer say, well, I didn't violate anything?
You told me I could do it.
Why is it a violation?
Mr. McDowell: In the first place, there was no communication in this case, and there typically is no communication when we're speaking only of the authorization process.
Justice Stevens: But what if there were... what if there had been a communication?
Would it be different?
Would it be a different case if the merchant put the bank officer on the phone and said, you're over your limit, and the... and the customer said, is it okay for me to pay the extra 15 bucks for this... go over the limit $15?
He says, yes, we'll... we'll okay it.
And then they hang up.
At the end of the month, he gets a $15 charge for that.
Would that be... that would not be an extension of credit in your view if they talked on the phone and agreed to it instead of having to just go through these anonymous communications.
Mr. McDowell: It would look more like an extension of credit, I... I might grant you, but the board is still entitled to draft categorical rules by virtue of its authority under section 1604(a) to make classification adjustments and exceptions.
Justice Stevens: There's no duty on the... on the part of the bank to say, of course, if we okay it, you have to pay an extra 15 bucks.
Mr. McDowell: Well, Your Honor, you're raising a policy question that Congress or the board could address whether additional disclosures are required at the point of purchase.
Here we're talking about disclosures that occurred later, days or weeks later, when the customer receives her periodic statement.
Justice Stevens: Just a bill that said, you didn't realize it, but you just earned a... you just... you owe us $15 that you should have realized.
Mr. McDowell: Well, and whether it's imposed as a finance charge or... or as an other charge, the consumer is still going to have the... the kind of surprise that you referred to.
And in the board's view, it doesn't make any meaningful difference whether, at that point when the customer receives her periodic statement, it is identified as one or the other.
Indeed, it could confuse the consumer to have the over-the-limit fee included in the historic or actual APR on her periodic statement.
If she were, for example, comparing that statement with a solicitation that she received by direct mail, she might be inclined to think that... that the solicitation offered better terms when it really did not.
Justice Ginsburg: Would you agree that... that it would be to the consumer's advantage to have this categorized as a finance charge because then she wouldn't have to pay interest on that in... in future charges?
Mr. McDowell: No, Your Honor.
She would still have to pay interest on it.
Whether it's labeled a finance charge or not makes no difference in that regard.
It only has to do with how it's labeled and whether it's included in the actual APR on the... the customer's periodic statement.
Even if it's labeled a finance charge, in other words, she can be charged additional interest.
The periodic rate can be applied to it.
So, in fact, the board has concluded that... that there's no benefit to consumers to treating over-the-limit fees generally as finance charges, and the Sixth Circuit's rule, in particular, would make no sense because it would depend on the creditor's subjective knowledge whether a particular charge was or was not included in the APR in the particular month.
That would impose significant compliance costs on creditors and would not tell consumers anything that's particularly meaningful to them.
When the board revised Regulation Z in the 1980-81 period, after the TILA Simplification Act, the board sought to focus on legally enforceable relationships, not on unenforceable understandings that a consumer might have as a result of a course of dealings with the credit card company.
And understanding this particular provision, consistent with its plain terms, as applying to all charges imposed or exceeding a credit limit is consistent with that approach.
It provides the meaningful disclosure and it avoids imposing unwarranted compliance costs.
If there are no further questions...
Argument of Sylvia A. Goldsmith
Chief Justice Rehnquist: Thank you, Ms. McDowell.
Ms. Goldsmith, we'll hear from you.
Mr. Goldsmith: Mr. Chief Justice, and may it please the Court:
This case has come full circle.
It started 4-and-a-half years ago with the filing of a complaint, a complaint that says if you authorize the request of a consumer to have more credit and you tie a fee for that authorization, that fee is a finance charge.
The question presented here is whether or not the Sixth Circuit has the right or should have invalidated a provision of Regulation Z with respect to the exclusion of certain over-limit fees, and we believe that resolution of that question brings us back to the complaint.
What does the complaint say in that regard?
Chief Justice Rehnquist: Are... are you fully defending the decision of the Sixth Circuit, Ms. Goldsmith?
Mr. Goldsmith: We... yes.
We believe that the Sixth Circuit's decision is that this fee, the fee in this case, is a finance charge, and we stand behind that decision 100 percent.
We have stated in our complaint that this fee... and... and it's important to remember that...
Justice Ginsburg: Ms. Goldsmith, before you continue, the Sixth Circuit said a portion of Regulation Z is invalid because it's incompatible with the statute.
Are you defending that invalidation?
Mr. Goldsmith: In theory, yes.
We... we feel that...
Justice Ginsburg: How about in practice?
Unidentified Justice: [Laughter]
Mr. Goldsmith: We feel that perhaps the court did not need to go there, that... in... in looking at the situation now, we... we have always...
Justice Ginsburg: But you asked... you asked the court to do that.
Mr. Goldsmith: Yes, we did.
Justice Ginsburg: When you argued the case before the Sixth Circuit, you made it very clear that you were seeking a holding that a portion of Regulation Z was incompatible with the statute.
Mr. Goldsmith: I think to the extent that Regulation Z says that anything you call an over-limit fee as excluded from the finance charge, that is incompatible with the regulation.
And we stand by our lower court argument that if that is the case, then that regulation cannot stand.
And... and once the Government stepped in, we realized... a significant part of their argument is that the... that the Federal Reserve Board could say that.
The Federal Reserve Board could say that all over-limit fees are excluded from the finance charge and we took that as a... as a tacit concession that the... the Federal Reserve Board didn't actually do that.
What they said, within the context of section 226.4(c)(2), is that fees, penalty fees, fees for unilateral acts of default, need not be disclosed as part of the finance charge.
And so while we support the Sixth Circuit's decision, this is a finance charge... no matter how you get there, you have to get to that point... alternately, as an alternate basis to support the decision, we realize that the regulation is not necessarily triggered in this instance.
Justice Ginsburg: But that's an argument you didn't make before the Sixth Circuit.
The Sixth Circuit... you told them that this regulation was incompatible with the statute.
Mr. Goldsmith: That is correct.
And I... I have to fall on the sword in that regard, that honestly, until the Government stepped in and helped clarify that issue for us, we did... we were fighting a battle we didn't need to fight.
And ultimately...
Justice Ginsburg: But they clarified it in the Sixth Circuit.
So why didn't you say, oh, Sixth Circuit, we've now seen the light and we... we don't want the regulation declared invalid?
Mr. Goldsmith: I don't believe that the Government clarified that for us in the Sixth Circuit.
What... what clarified it for me was the Government's brief, the merit briefing in this case, where they said, I believe 28 pages into a 30-page brief, if the Federal Reserve Board wants to exclude all over-limit fees, they could, and that's sort of when the light bulb went off.
They didn't.
And that... that's sort of what took us where we are.
And ultimately, I think there's precedent for this Court to review the ultimate basis to support this decision based on making sure that the...
Justice Ginsburg: Well, you used the word review.
We wouldn't be reviewing it.
We would be taking a first view of it.
Mr. Goldsmith: I'm sorry.
Justice Ginsburg: But you didn't... you... we would not be reviewing anything that the court below determined.
We would be accepting a new argument that has not been aired below, and that's not review.
Mr. Goldsmith: I think that in Connecticut v. Door, for instance, this Court acknowledged that there are circumstances that this Court wants to make sure that the right rule of law is handed down.
And if the questions are intertwined, the... the issues that were raised below and an alternate argument in support of the decision is raised before this Court, if it's a matter of importance, if it's a matter that the lower courts need direction on, if it's a matter that has been...
Chief Justice Rehnquist: Usually if we're asked to affirm on an alternate ground, it's a ground that the court of appeals passed on as kind of an alternate ground.
Here, the court of appeals didn't pass on this at all.
Mr. Goldsmith: I agree.
And like I said, I... I believe in the Connecticut v. Door case, this Court acknowledged that alternately we cannot put form over substance, and we need to make sure that the right rule of law is passed down.
And I believe Justice Scalia, as a concurring comment in U.S. v. Burke, said there's got to be play in the joints, that even if it is not something that came to the Court procedurally, if it is something that... that meets the three factors I was enumerating from Connecticut v. Door, the Court will entertain an argument.
Chief Justice Rehnquist: It isn't just a procedural point, Ms. Goldsmith.
We do better if we have an opinion of the court of appeals on the subject than if we're just launching it into... for the first time ourselves.
Mr. Goldsmith: And I would agree, and... and the only defense that I have to that is that this is a matter that has been fully briefed and argued by counsel before this Court.
And when... when the case got taken in by this Court, everyone said to me, you have to remember why they took it in, and... and my understanding is is because the regulation has been challenged.
And...
Justice Breyer: What other argument is there?
Justice Souter: I don't understand.
Justice Breyer: I thought... and I'm just mixed up about this.
I thought that there is a Z regulation.
It's called Regulation Z.
Unidentified Justice: And I thought Regulation Z says the following is not part of the finance charge, a charge for exceeding a credit limit.
Justice Breyer: Now, are we talking about something in this case that is not a charge for exceeding a credit limit?
Mr. Goldsmith: I believe so.
Justice Breyer: What?
Mr. Goldsmith: I think that a fee denominated an over-limit fee that is actually an anticipated cost for approving an extension of credit is in fact a finance charge.
Justice Breyer: Does it say on the paper this is a charge for exceeding a credit limit?
Mr. Goldsmith: I believe they called it an over-limit fee assessment.
Justice O'Connor: All right.
Justice Breyer: And so it's called an over-limit fee assessment and you pay it if you exceed the credit limit.
You don't pay it if you exceed the credit limit, or do you?
Mr. Goldsmith: I think that's a factual question.
I... I think...
Justice Scalia: Oh, okay.
Justice Breyer: Well, what is the answer to the factual question?
Do you pay for exceeding the credit limit or do you not pay it for exceeding the credit limit?
Mr. Goldsmith: I believe the facts of this case... this is not a fee that was imposed for the unilateral act of exceeding a credit limit.
Justice Breyer: Okay.
Justice Scalia: So...
Justice Breyer: It depends, doesn't it, on...
there's a new argument, the first time in this Court, that this is not a fee for exceeding a credit limit.
Was it made below in any form?
Mr. Goldsmith: I believe the allegations of our complaint have always been clear.
Justice Breyer: Oh, yes, but, I mean... that may be.
I'm just asking, have you ever told any court before today that this is not the... I'm not... it sounds sarcastic, but I don't mean it to be sarcastic.
I want to know.
Have you ever before argued in this case, told a judge and... that this is not a fee, quote, for exceeding a credit limit?
End quote.
Mr. Goldsmith: No.
Justice Breyer: No.
Justice Scalia: Ms. Goldsmith, we wouldn't resolve a whole lot in this case, however, if we didn't reach that question, would we?
Mr. Goldsmith: I don't believe we would.
Justice Scalia: We... we'd just have another case a little bit down the line, perhaps with the same parties before the Court, arguing this... this follow-on question.
Right?
Mr. Goldsmith: I believe absolutely.
I think that what we realized is that the arguments that we were making in the court below, which... which we stand by, were premature.
Justice Scalia: If we don't resolve it, we've essentially wasted our time.
What... what... doesn't it depend upon what the regulation means by credit limit?
It could mean that limit set forth in the... in the agreement with the credit card company, past which there is no obligation on the part of the company to extend you any further credit.
It could... it could reasonably mean that.
Indeed, that... that's what I would normally think it does mean.
Or it could mean what you want it to mean, whatever limit the company later places upon your desire to... to go ahead.
Now, why should we accept your interpretation of it rather than the interpretation of the agency?
We usually do accept the agency's interpretation of its own regulation.
Mr. Goldsmith: I don't believe that our interpretation conflicts with that of the Federal Reserve Board.
If... if we look at the plain language of the regulation...
Justice Scalia: We wouldn't be arguing here.
I mean...
Mr. Goldsmith: I believe what the... what the Federal Reserve Board has said is that when you have a fee for a unilateral act of default, that that fee is properly excluded from finance charge.
I believe in the...
Justice O'Connor: Well, don't we have to accept the Government's position?
It's representing the agency, is it not?
Mr. Goldsmith: Absolutely.
Justice O'Connor: So it is the agency position.
Mr. Goldsmith: I don't believe that you will find in the Government's brief an argument that the fee alleged in this case necessarily fits within the terms of section 226.4(c)(2).
In fact, I believe several times, pages 17, 18 of the Government's brief, they talk about how over-limit fees were included as a penalty fee in that portion of the regulation.
That gets us back to the complaint.
Was the fee charged here a penalty fee or was it a fee for an anticipated, approved extension of credit?
Justice Breyer: I didn't think that was the Government's argument in my... as I read it.
I thought there are some words here.
For exceeding a... it says, for exceeding a credit limit.
And as I understood the argument... I might not have perfectly well... is... I thought that their argument is basically when you exceed a credit limit, the company doesn't want you to do it.
Okay?
So it says, no.
And if you do it, we're not going to cancel you out, but we will charge you a penalty.
Now, sometimes it's what you say.
Sometimes the company would love you to do it and get the extra money.
In fact, they might make profits on that.
So they'd love you to do it.
But trying to distinguish between those two instances is too difficult, and because it's too difficult, we are going to have a blanket rule, and the blanket rule is if you fall within these words, exceeding a credit limit, this is not a finance charge.
Now, that's what I understood it to be, a typical administrative agency argument.
And they say Chevron, Mead, et cetera, we win.
Justice Kennedy: All right.
Justice Breyer: Now, suppose let me... for the purpose of answering, please assume that you do have a charge here that falls within the term, exceeding a credit limit.
What is your response to the argument that I just made?
Mr. Goldsmith: I think if we assume that this fee is a fee for exceeding a credit limit, then we need to look at the nature of the fee and determine whether or not that is obviously repugnant to the statute.
And I think part of... of what we have been accused of doing is creating an impossible factual distinction.
Some would be disclosed as a finance charge, some would not.
And I direct the Court to the regulation itself that draws that factual distinction as to late fees.
The... the Federal Reserve Board went out of its way, in both the language of the regulation and the commentary, to say if this is a unilateral act of default, you have paid late or not in the amount that you were supposed to pay and we absolutely did not authorize that, that must... that would be excluded from the finance charge.
But if the creditor acquiesced in that in any way, that is a finance charge.
And what our position is is that a late fee...
Justice Scalia: I mean, you say the agency said this?
Where... where did the agency say that?
Mr. Goldsmith: In both the regulation itself and the commentary.
In the commentary...
Justice Scalia: What... what portion of the regulation says that?
Mr. Goldsmith: That's in 226.4(c)(2) in the portion that says actual unanticipated late payments.
And in the commentary, the... the board has defined actual, and it's the qualification of actual unanticipated goes to the question is this a unilateral act of default or is this something that the creditor acquiesced in.
So our... our point is is that if you look at...
Justice Scalia: I suppose that depends on what... what time period unanticipated refers to.
Mr. Goldsmith: I believe that the commentary helps explain that for us.
Justice Souter: Okay.
Justice Scalia: What does the commentary say?
Mr. Goldsmith: The commentary says if this is truly a late fee because you have paid and the creditor could do nothing about it, then that is going to be an actual unanticipated late fee.
But if this is something that month after month after month you paid late every month and they could be deemed to have acquiesced in that late payment, that must be disclosed as part of the finance charge.
Justice Scalia: Where... where is that in... in your brief?
Mr. Goldsmith: The portion of the commentary... to be perfectly honest, I don't know if the... if the commentary is reprinted in the appendix.
The regulation language is...
Justice Scalia: Gee, if it's that central, I would have thought it ought to have been there.
It's new to me.
Where... where is it?
Mr. Goldsmith: I don't know, Your Honor.
Chief Justice Rehnquist: You don't know what you just said?
Mr. Goldsmith: I don't know where in the appendix it is is what I don't know.
I know that section 226.4(c)(2)... the commentary specifically outlines the fact that there is a distinction between acts of default and... and acquiesced... oh, thank you very much.
What counsel was handing me is the actual C.F.R..
I mean, the commentary that follows C.F.R. section 226.4(c)(2).
What I don't believe is that is reprinted in full anywhere in the appendix or in the briefing.
I thought that's what your question was.
Justice Scalia: Yes, sort of.
I... I'd like to know what it is that you're... you're saying makes your case.
I... I don't have the text in front of me and you say it's nowhere to be found in all of these voluminous materials that we have for this case.
Mr. Goldsmith: I was trying to give an analogy as to late fees which is somewhat tangential to the issue.
What the point is is that a late fee... you have to start with what the concept of an extension of credit is.
And... and we do outline this in our brief, that we're talking about each and every time a consumer seeks to make a purchase, they're essentially saying may I have an extension of credit to cover the purchase.
Justice Souter: May I ask you a question about that?
If... if you are correct in your analysis, why isn't the answer to the problem that you raise here is simply that they are not entitled to charge you any fee at all, no matter what you call it?
Because if I understand your... and I may not, but if I understand your argument, your argument is they agreed to my charging beyond the limit in the agreement as we originally negotiated it.
They said it's okay.
And if that is the case, why isn't your argument and your remedy simply they can't charge me any penalty at all for that?
They agreed to it.
And we never even get into the question that we've got in this case.
Mr. Goldsmith: I think the answer to the question is is that this is really no different than a request to... to... a request to make a purchase below the credit limit versus a request to make a purchase above it.
Either way, they could charge you a fee.
I mean, that's... that's what...
Justice Breyer: No.
Mr. Goldsmith: credit is.
Justice Souter: But if your point... and I think I'm not getting your point, but if your point is that they approved this in the sense that they said, yes, we will honor this... they're telling you in... in effect... we will honor this charge and that that, in effect, is a renegotiation of your credit limit with the bank, then it would follow that they can't charge you any penalty at all.
The only thing they can make you do is pay what you have charged.
And if that's the case, we don't need to get into this... this complicated question about Regulation Z.
Unidentified Justice: All you have to say is, I don't owe you a cent for exceeding the credit limit.
Justice Souter: Why isn't that the answer to your question or to your problem?
Mr. Goldsmith: I think two things.
First of all, we have never claimed that this is a renegotiation of the credit limit.
We have always taken the position that there is a distinction between renegotiating your credit limit and getting an extension of credit that happens to take you over your credit limit.
So that... that's the first issue.
The second issue is...
Justice Souter: So you're saying, yes, it violates the contract, but it's okay to violate the contract because they... they approved in advance this charge.
Mr. Goldsmith: We do not feel that it's a violation of the contract if they allow you to do it.
Justice Souter: Then if it's not a violation of the contract because they allowed you to do it, why do you concede that they can charge you any fee at all for doing that?
Mr. Goldsmith: I'm not conceding that they can charge you a penalty on top a finance charge, but what I'm saying is that anytime a creditor extends credit, they may charge a fee and...
Justice Breyer: Okay.
Mr. Goldsmith: as a credit.
Justice Souter: They may, but in the original contract with you in the... the... at the... at the beginning of your relationship with the bank, they didn't spell out the particular situation that you're describing here.
They said, in... if I understand it, if you go over the limit, we charge you X dollars, and... and that was the extent of it.
You're fighting about whether the X dollars should be classified as a finance charge or something else, but your argument now is a different kind of argument.
Your argument now is they, in some sense, approved my going over the limit.
If that does not change the original agreement, then what difference does it make?
If it does change the original agreement, then why isn't your remedy simply to say you can't charge me a fee at all for going over the limit?
Mr. Goldsmith: I believe what we have always said is that this extension of credit was like any other extension of credit on the card.
Whether Ms. Pfennig goes in 2 weeks before her... her credit limit was exceeded and says, may I have enough credit to make this purchase, and they say, yes, and contractually we know...
Justice Souter: Yes, but your... your argument is that the extension of credit in this case is an agreement to exceed the credit limit.
Isn't that your argument?
Mr. Goldsmith: I don't think so.
Justice Scalia: I thought your argument, Ms. Goldsmith, was that the contract provides that any extension of credit over the credit limit shall be subject to the regular percentage plus the $15 penalty.
Justice Stevens: Right?
Justice Scalia: I mean, you acknowledge that there is an agreement at the outset as to what the finance charge will be for this added extension of credit.
It'll be the regular rate plus the penalty.
Mr. Goldsmith: I don't...
Justice Scalia: If that's not your argument, then... then I think Justice Souter has to be correct.
Mr. Goldsmith: I think at this stage of... of the litigation, since we have not conducted any discovery, we have not seen the actual cardholder agreement to know what it says with regard to over-limit fees.
So I don't think I can answer the question in that regard.
Justice Ginsburg: Didn't... didn't Ms. Pfennig get a copy?
I mean, the... isn't it on her monthly bill?
Mr. Goldsmith: On her bill it will tell her what her contract rate is, but the initial disclosures... I believe she had this card 7-8 years before this happened and it is not in the record.
Justice Ginsburg: I thought... I thought the terms have to be disclosed monthly in addition to when the credit card is new.
Mr. Goldsmith: What has to be... and... and I believe that... that Mr. Waxman explained this, but you have your initial disclosures that come with the card when you originally get it.
What has to be disclosed on a periodic basis is an itemization of each extension of credit that you've received, a total that you've received, plus your... your APR.
Those types of terms of what the cost of credit is on a monthly basis are going to be on your periodic statement.
I believe what... what Justice Scalia's question was is what does the credit card agreement say as to is she going to be charged a flat fee, is she going to be charged a flat fee plus the finance charge, and that is not in the record.
We don't have that.
Justice Souter: And if that's not in the record, how can you make the argument you're making?
Because the argument you're making depends on whether, in effect, the... the agreement is Justice Scalia's suggestion or my suggestion.
And if that's not in the record and you don't know, how do we get into this at all?
Mr. Goldsmith: I think the confusion is coming in because ultimately what is or is not labeled in an over-limit fee may not be a fee for exceeding a credit limit as that term has been used in the regulations.
Justice Souter: And the only way we can tell that is to look at the contract, isn't it?
Mr. Goldsmith: I don't believe so.
Justice Souter: No?
Mr. Goldsmith: I believe that if you look at section 1637(b)(2) that describes how each and every extension of credit needs to be itemized, we're talking about a singular event, an extension of credit.
She says may I make this purchase.
May I have an extension of credit to cover this purchase, and they say yes.
And in everyday experience, we all know that means you're going to be charged something for that extension of credit.
It's going to be charged a finance charge.
Chief Justice Rehnquist: Are you talking about just an ordinary credit card transaction where you go in and say, look, I'm buying a pair of gloves and I want to put them on my credit card?
This you're describing as a request for an extension of credit?
Mr. Goldsmith: Absolutely.
Chief Justice Rehnquist: Okay.
So we're starting back that simply.
Then how did we get so complicated?
Mr. Goldsmith: I'm not quite sure.
[Laughter]
Justice Stevens: Well, one reason it's complicated, if I understand your position, you're objecting both to the fee and to the later statements imposing an interest charge on the fee, aren't you?
Mr. Goldsmith: I think it's triple dipping, yes.
I think that, as Justice Ginsburg pointed out, they... they charge you for the extension of credit.
You get a finance charge on your actual extension of credit.
They impose a penalty fee, and then they charge a finance charge on the penalty fee...
Justice Scalia: If that's in the contract, so what?
A deal is a deal.
If you agree, I pay 10 percent up to this amount, if I go over that amount, I pay 10 percent plus $15, if that's in the contract, isn't that perfectly fair?
Mr. Goldsmith: I think...
Justice Scalia: And you don't know whether it's in the contract.
So you can't say it's unfair.
Mr. Goldsmith: But this is not a breach of contract case.
This is a Truth in Lending Act case, and the only thing the Truth in Lending Act...
Justice Scalia: Whether it is or not, you shouldn't call it unfair if you don't know.
Mr. Goldsmith: I don't recall using the word unfair.
I'm sorry.
I... I believe that Truth in Lending is about disclosure as to whether or not they have to...
Justice Stevens: Could I interrupt with this one question?
I want to be sure I get it out before the argument is over.
Would you explain to me what difference it makes, in terms of notice to the consumer, whether one calls it a... an other charge or a finance charge?
In either event, doesn't the consumer get exactly the same notice?
Mr. Goldsmith: I don't believe so because when it is charged as a flat fee as an other charge, besides the fact that there's interest charged on top of it, the consumer is in a position that they then need to compare cost of credit, one, as a dollar figure, the other as an APR.
And while I believe Ms. McDowell said that the primary purpose of TILA is to create bright line rules for the credit card industry, I think there is significant support, as this Court has stated, that one of the primary objectives is making sure the consumer can understand the cost of credit.
And... and Congress has said we...
Justice Stevens: But why would the consumer understand the cost of credit any better by labeling it a finance charge rather than an other charge?
That I haven't... you haven't explained to me.
Mr. Goldsmith: Because Congress said we want that to be an apples-to-apples comparison.
So Ms. Pfennig can know that the extensions of credit she received up till now were charged at 18.49 percent.
She knows that the extension of credit she received over her credit limit was $29...
Justice Breyer: So how does that work?
I... I exceed my credit by $15.
My colleague exceeds his credit by $42.
Each of us is charged a $15 late fee.
What's the interest rate?
And, of course, there are an infinite number of possibilities.
So I guess I'd get a... a statement that would be every conceivable possibility of how much I go over with interest rates ranging from like .2 percent to 48,000 percent.
So, I mean, how... how is this supposed to work?
Mr. Goldsmith: The simple answer is I don't know.
Ultimately I think the Federal Reserve Board does have to offer the direction of how this will be disclosed, but I think the important thing... and I believe...
Justice Breyer: I think that's why Justice Stevens might have thought it's going to confuse the consumer if you win, not help the consumer.
Justice Scalia: I would think it's much more informative to the consumer to know that my interest rate for all of the things up to the... my credit limit has been this past month so much, and... and then see a separate charge, God, I got socked 15 bucks for going over my credit limit.
You think you're helping the consumer by... by taking that $15 separate charge and just mushing it into the general overall credit limit so that instead of thinking he's being charged 10 percent, he thinks he's being charged 11... 11 percent, and he doesn't know anything about the late... about the... the going over his over limit fee?
I don't think that helps him at all.
Mr. Goldsmith: But I don't believe that that's necessarily how it would be done.
I believe that, Justice Breyer, you had said earlier about how certain... there are instances where certain fees are disclosed differently.
You can have a situation where a cash advance is calculated at a different APR than the contract rate of the finance charge.
An ATM fee might be charged at a different... a different APR than something else.
And those are itemized at the bottom.
You wouldn't necessarily not let them know that this was a charge incident to something over the credit limit, but you would put it in apples-to-apples comparison, which I believe...
Justice Breyer: But, of course, the difficulty for you is all you have to say is that the view I was taking somewhat by argument is a reasonable one, and if it's a reasonable one, I guess it's a reasonable interpretation of the statute.
And therefore, Regulation Z doesn't violate it.
Now... now, you haven't been able to show us how we'd get on the opposite interpretation.
We didn't even know what the statement would look like.
So it's very hard for me to say it's not reasonable what the... what the... that Regulation Z, isn't it?
Mr. Goldsmith: I think that ultimately depends on... on the construction of the regulation.
We... we seem to want to parse out for exceeding a credit limit without looking at the context of the regulation that these are acts of default.
And what we have alleged in the complaint, which ultimately is controlling here, is not an act of default.
So in that instance, the regulation is not triggered and it's premature for us to decide whether or not it was rationally based.
Justice Ginsburg: The one thing that the... the board has said is we don't want these individual to make every extension of credit or what... to do this kind of thing on a case-by-case basis.
That's why we're establishing these categories.
And your interpretation was making the credit card company has to know and every one is going to be a knock-down, drag-out, specific facts of the case.
And that's exactly, it seems to me, what the board didn't want to have happen.
Mr. Goldsmith: And I think that gets back to Justice... Justice Kennedy's question of quite some time ago.
Where I was trying to go is that there is a distinction in the nature of a late fee and an over-limit fee.
And the... the Federal Reserve Board went out of its way to create that factual distinction as to late fees.
And late fees, by nature, are on the periphery of the cost of an extension of credit.
While the total has to be disclosed and your late payment is associated with whether or not you paid toward the total, an over-limit fee by its nature is tied to a specified extension of credit.
May I have this extension of credit, which happens to take me over the credit limit?
Yes, you may, but we are going to charge you a fee for that.
And I think that's the distinction, is that to the extent we have to get to... let's just assume the regulation controls here.
Does it make sense?
Is it rationally based to create a factual distinction as to late fees which are on the periphery of the cost of an extension of credit and not do so for an over-limit fee that goes to the very core of what the finance charge is supposed to disclose?
Justice Ginsburg: Now you're going back to the regulation itself is no good.
Mr. Goldsmith: To the extent that it controls here, which I'm not sure it does, I think yes.
And that... that decision comes down the nature of the fee and whether or not it is so integrally tied to the cost of an extension of credit that it has to be disclosed as part of the finance charge, and we think that it does.
Justice Ginsburg: Ms. McDowell said that... that in dollars and cents, there's no difference to the customer using... there is a dollars and cents difference, I take it, and would you explain what it is?
Mr. Goldsmith: Yes.
With all due respect, I believe she said... may I finish the question?
Rebuttal of Seth P. Waxman
Chief Justice Rehnquist: I think you've answered it.
Mr. Waxman, you have 3 minutes remaining.
Mr. Goldsmith: Thank you.
Mr. Waxman: The question of whether or not we disclosed this fee properly within the regulation was passed on by the lower court.
It is the law of the case.
The lower court held, as the second part of its ruling, that, quote, unequivocally the regulation required us to disclose this fee as an other charge.
Now, Justice Scalia is correct that how you interpret the Fed's bright line regulation which says, at page 2 of our blue brief, the following charges are not finance charges.
Charges for exceeding a credit limit, of course, depends on what credit limit means, and credit limit is a term of art.
Everybody in the industry understands it.
Even the respondent at page 1 of her brief, she says, quote, in the middle of the page, a credit limit represents the amount of credit the card issuer has preapproved the consumer to obtain.
There's no possible allegation in this case that she ever asked for an extension of her credit limit or received an extension of her credit limit.
And there is a reason that the board came up with an absolute bright line rule, and the reason is that before 1980, when Congress mandated classifications in order to simplify things for creditors and consumers, the Federal Reserve Board confronted... confronted questions like many of the hypotheticals that Justice Stevens and others have asked here.
Well, what if... what if they knew that it was going to exceed it and what if somebody actually called and asked permission.
I don't want to be embarrassed in the store.
Will you authorize this?
The board literally... and some of... many of these letter interpretations are cited in the briefs in this case, although not all of them.
The board drove itself crazy trying to answer all of these hypotheticals and came up with a set of letter rulings, exacerbated by the Federal courts also trying to come up with their own interpretations, that made it impossible for issuers to come up with formulaic disclosures that would prevent them from being socked with huge class action awards and allowed them to present information that consumers could compare.
And so Congress said in 1980 we want bright line classifications, and that's exactly what the board did.
In 1980, the board said that it was amending its regulations to, quote, substitute where possible precise, easily applied rules for principles that create ambiguity and...
Chief Justice Rehnquist: Thank you, Mr. Waxman.
Mr. Waxman: Thank you, Your Honor.
Chief Justice Rehnquist: The case is submitted.
