Fall 2004-08 Over-limit fees are not finance charges

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Number 57
Fall 2004

Over-limit fees are not "finance charges"

Under the Truth in Lending Act lenders must disclose to their customers all "finance charges" to be paid. A fee imposed when the customer exceeds his or her authorized balance is not a finance charge and need not be disclosed. Household Credit Services, Inc. v. Pfennig, No. 02-857 (6th Cir. April 21, 2004).

"Finance charge"

TiLA defines "finance charge" as an amount "payable directly or indirectly by the [consumer], and imposed directly or indirectly by the creditor as an incident to the extension of credit." Regulation Z, promulgated by the Board of Governors of the Federal Reserve System to implement TiLA, interprets the definition as excluding charges for exceeding a credit limit.

Congress did not contemplate that all charges connected to a credit transaction be deemed finance charges, according to the Court of Appeals, and Regulation Z's exclusion of over-limit fees is not manifestly contrary to the law. As a matter of fact, in TiLA Congress granted the FRB expansive authority to prescribe Regulation Z.

Over-limit fees can better be characterized as penalties for the customer defaulting on the credit agreement, concluded the court.

© 2004 Goldman Antonetti & Cordova, LLC