IN RE: REQUEST BY MICHIGAN NATIONAL BANK FOR A DECLARATORY RULING ON WHETHER A LATE CHARGE FOR A DELINQUENT CREDIT CARD PAYMENT OR OTHER DEFAULT IN PAYMENT CONSTITUTES "INTEREST" OR "INTEREST AND CHARGES" AND THEREFORE IS TO BE INCLUDED IN THE CALCULATION OF THE INTEREST RATE.

DECISION

Statement of Facts

Michigan National Bank (hereinafter, MNB) is a national bank organized under the National Bank Act, 12 U.S.C. 21 et seq, and having its principal office located in the State of Michigan. MNB and many of its Michigan customers have entered into credit card agreements by the terms of which MNB honors its customers' drafts and advances money to such customers on an open end revolving credit basis. Under the terms and conditions of its credit card agreements and pursuant to applicable law, MNB assesses interest and charges in a combined amount of 1.5% per month computed from time to time on the unpaid balances. MNB contemplates imposing a late payment fee, in addition to the 1.5% interest and charges, for any unanticipated late payment, delinquency, or default on a credit card account. MNB indicates that the amount of the proposed late payment fee would be calculated to closely approximate the reasonable and actual costs incurred by the bank in handling delinquent accounts (hereinafter, a reasonable late charge).

The threshold question is as follows: is MNB permitted to charge, in addition to the interest and charges of 1.5% per month on the unpaid balance which is charged to all of its credit card customers, a reasonable late charge on each of its delinquent credit card accounts.

On Monday, March 31, 1986, a letter from Mr. Rex E. Schlaybaugh, Jr. of the law firm Dykema, Gossett, Spencer, Goodnow, & Trigg representing MNB was received by Commissioner Eugene W. Kuthy. The letter requested a declaratory ruling on the above-captioned question. Accompanying, and in support of the request for a declaratory ruling was a memorandum of law.

Statutes

The sections of law to which the threshold question applies are as follows:

1. Section 191 (a) of the Banking Code of 1969, as amended, (hereinafter, Code), MCLA 487.491 (a):

"Banks may collect interest and charges on loans as follows:

(a) On any loan made pursuant to an existing credit card arrangement or other agreement existing prior to the loan whereby the bank honors the borrower's draft, pays or agrees to pay the borrower's obligations, purchases the borrower's obligation, or advances money to or for the account of the borrower and in which the loan finance charges are not precomputed but are computed from time to time on the basis of the unpaid balances, interest, and charges in the combined amount of not to exceed 1.5% of the unpaid balance per month."

2. Section 718(3) of the Savings and Loan Act of 1980, as amended, (hereinafter, S & L Act), MCLA 491.718(3):

"On credit- card arrangements or other agreements existing before the loan which are authorized by section 704(1)(c), an association or a service corporation may charge a discount of not more than 5% of the gross amount of obligations purchased by the association and may collect simple interest on the unpaid balance in an amount not to exceed 1.5% per month."

3. Section 10(1) of the Credit Card Act, (hereinafter, CC Act), MCLA 493.110(1):

"On any loan made or credit extended pursuant to a credit card arrangement which arrangement provides that 1/12 or more of the principal balance outstanding shall be repaid each month, a licensee may collect interest not to exceed 1.5% of the unpaid balance per month."

Discussion of Law

The authority of a lender to assess a late charge has been recognized by the courts and by the Attorney General. Generally, courts have viewed a late charge as a permissible charge assessed as a result of a delinquent payment on a loan or other extension of credit if the borrower or debtor can avoid the additional charge by making prompt payment. State Mutual Rodded Fire Insurance Company Of Michigan v Randall, 232 Mich 210. The Attorney General has distinguished a late charge from an interest charge. For example, the Attorney General opined that a late charge, required under the terms of a land contract, does not constitute interest subject to the interest rate ceiling for land contracts if the charge is imposed for an unanticipated late payment or other similar occurrence. The amount of such a late charge must be reasonable, reflecting the expense of the inconvenience incurred. OAG #5904, May 15, 1981. See also OAG #5167, March 21, 1977 and OAG #6338, January 23, 1986.

MNB argues that the imposition of a late charge on credit card accounts does not constitute "interest" or "interest and charges," as applicable, under the relevant sections of law (quoted above). The late charge which MNB contemplates would be assessed only as a result of a default by the borrower. From the standpoint of the borrower, the late charge is an avoidable fee, i.e., whether a late charge will be assessed is under the control of the borrower. On the other hand, from the bank's perspective, a late charge arises from an unanticipated late payment. Unlike interest, which is assessed to all borrowers, a late charge is assessed only against a borrower who is late with a payment.

The Attorney General has opined that "in enacting 1978 PA 96 amending Section 309 of the Home Improvement Finance Act, the Legislature "has established the exclusive means of assessing default charges when a debtor fails to meet timely his installment obligations." (See OAG #5486, April 30, 1979). Similarly, on August 11, 1980, in a memorandum opinion, the Attorney General opined that in Section 191(c) of the Code, the Legislature established the exclusive means by which late charges can be exacted on simple interest installment loans under the Code. The Attorney General concluded that a bank may not assess a late charge where the Legislature has expressly prescribed an alternative method for assessing late charges. Section 191(a) of the Code does not prescribe a method by which a bank may assess a charge when a payment is made after the due date.

Section 191(a) of the Code is silent on whether a bank may assess a late payment charge as a result of a default on a credit card account. The late charge, as represented by MNB, is intended to recover the "additional expense to the Bank in administering the delinquent account." The amount of the fee contemplated by MNB would not appear to be geared to the amount of the payment that is late but would reimburse the bank for the additional expenses occasioned by the late payment. Nor, according to MNB, is the late payment charge intended to compensate the lender for the additional interest cost borne by the lender.

Conclusion

In responding to the threshold question, the Bureau feels compelled to address two separate issues. The first issue is the threshold question as it relates to the applicable sections of law. In answer to the threshold question as it relates to Section 10 of the CC Act, it is concluded that while a reasonable late charge is not part of the "interest" which is subject to the 1.5% per month ceiling Section 2(2) of the act contains restrictive language that appears to prohibit the assessment of any fees or charges absent specific authorization. Section 2(2) states as follows:

Sec. 2(2) A licensee shall not make or offer to make a credit card arrangement except on the terms and conditions authorized by this act and the rules promulgated under this act.

Since the act expressly authorizes a licensee to collect only interest of up to 1.5% per month on the unpaid balance and a fee for the privilege of having a credit card or charge card, it is concluded that the above limiting language prohibits the assessment of a late charge.

In response to the threshold question as it relates to Section 191(a) of the Code, it is concluded, based on the foregoing Discussion of Law and on the fact that Section 191 of the Code does not expressly prohibit the assessment of late charges, that a bank may assess a reasonable late charge in connection with a delinquent payment made under a credit card agreement and such reasonable late charge does not constitute "interest and charges" under Section 191(a).

In response to the threshold question as it relates to Section 718 of the S & L Act, it is concluded that a bank, using the "most favored lender" authority,* may borrow the authority to charge "simple interest" of up to 1.5% per month, may assess a reasonable late charge as a result of a delinquent payment, and such charge does not constitute "interest". Like Section 191(a) of the Code, Section 718 of the S & L Act does not expressly prohibit the assessment of a late charge in connection with a late payment under a credit card agreement. Moreover, the S & L Act contains no language which prescribes the method of collecting charges for late payments (such as the language found in Section 191(c) of the Code).

It should be added and underscored that the above conclusions are subject to the following conditions:

• The right to assess and collect a late charge must be contained in the bank's agreement with its credit cardholders.

• The amount of the late charge should be a flat fee and should be reasonable and fairly reflect the amount of additional expenses that the bank typically incurs in handling delinquent payments.

The Bureau cannot pass judgment on the reasonableness of the amount of the fee (up to $15) that MNB contemplates. MNB did not propose a late charge of a specific dollar amount, nor did it furnish information identifying the additional processing steps the bank must perform and which are occasioned by a delinquent payment. The Bureau believes that the bank, using reasonableness as a guide, could have proposed a late charge of a specific amount without forfeiting its right subsequently to adjust the amount of the charge in the face of a changed set of circumstances, e.g., an increase in costs incurred. It should also be noted that the failure to state a fee of a specific amount or to identify the additional processing steps arising out of the late payment is not a trifling omission. This conclusion is based on Section 63 of the Administrative Procedures Act, MCL 24.263, which reads as follows:

"On request of an interested person, an agency may issue a declaratory ruling as to the applicability to an actual state of facts of a statute administered by the agency or of a rule or order of the agency. An agency shall prescribe by rule the form for such a request and procedure for its submission, consolidation and disposition. A declaratory ruling is binding on the agency and the person requesting it unless it is altered or set aside by any court. An agency may not retroactively change a declaratory ruling but nothing in this subsection prevents an agency from prospectively changing a declaratory ruling. A declaratory ruling is subject to judicial review in the same manner as an agency final decision or order in a contested case." (emphasis added)

This section states that "an actual state of facts" is to be the basis for a declaratory ruling. In our opinion, "an actual state of facts" should include both the specific amount of fee contemplated and the basis for arriving at that amount. Since a declaratory ruling is subject to judicial review, the Bureau is reluctant to issue a declaratory ruling on less than an actual state of facts. To do so could result in the declaratory ruling being overturned by a court.

Therefore, it is the opinion of the Bureau that a bank may assess a reasonable late charge as a result of a delinquent payment. The question concerning the reasonableness of assessing a late charge of "up to $15" is not a proper request and no response can be provided.

* The "most favored lender" authority permits a federally insured depository financial institution, on a given type of loan, to charge the greater of one percent in excess of the Federal Reserve discount rate or the rate allowed "by the laws of the State" where such depository institution is located. See OAG No. 5894, May 1, 1981. Tiffany v National Bank of Missouri, 85 US 409; 21 L Ed 862 (1873); and Northway Lanes v Hackley Union National Bank & Trust Co., 464 F 2d 855 (CA6, 1972).

Eugene Kuthy, Commissioner
Financial Institutions Bureau
Department of Commerce
June 17, 1986