Pfennig v Household Credit Service, Inc. and MBNA America Bank, N.A.

Updated 4/21/04 The United States Supreme Court has reversed the Sixth Circuit (Pfennig v Household Credit Service, Inc. and MBNA America Bank, N.A.) and held that over limit fees are not a finance charge and need not be disclosed as such.

The Court says, in this opinion, that Congress recognized an open-end credit plan may have both "finance charges" and other charges. Therefore, all charges are not "finance charges". The Truth in Lending Act explicitly addresses over-limit fees, defining them as fees imposed “in connection with an extension of credit” rather than “incident to an extension of credit".

Regulation Z, as written by the Federal Reserve Board, defines a "finance charge" as "a cost of consumer credit". Because an over the limit fee is imposed as a penalty for defaulting on the credit terms, it is "in connection with" and not "incident to" the extension of credit. As a penalty, it was excluded from the cost of credit and the finance charge.

The FRB adopted a uniform rule excluding from the term “finance charge” all penalties imposed for exceeding the credit limit. The Sixth Circuit adopted a case-by-case approach contingent on whether an act of default was “unilateral.” This method of defining finance charges would likely be neither workable for lenders nor understandable by consumers. As a result the FRB's interpretation will stand and the fees will not be included in calculations as a finance charge.