Smiley v. Citibank (South Dakota), N. A.

Background

A California woman who held two credit cards issued by a national bank in South Dakota was charged fixed late-payment fees under her card agreements. Those fees were allowed under South Dakota law but were challenged as unlawful under California law. She brought a 1992 class action on behalf of other California cardholders asserting contract, consumer-protection, and common-law claims. State courts dismissed the suit, and the California Supreme Court affirmed; the case then came to the United States Supreme Court.

Reasoning

The central question was whether the word “interest” in the National Bank Act covers late-payment fees. The Court deferred to a formal rule adopted by the Comptroller of the Currency that defines “interest” to include late fees and several other credit-related charges. The Court rejected the cardholder’s arguments against giving that rule deference — including that the rule came long after the statute, that the line between “interest” and “non-interest” is irrational, and that prior agency statements conflicted — and found the Comptroller’s interpretation to be reasonable. The Court explained that historical definitions and earlier decisions do not require limiting “interest” to time- or rate-based charges, and that penalty-style charges can fall within the statutory word “interest.”

Real world impact

Because the Court upheld the regulator’s definition, national banks may impose late fees and similar charges that are lawful in the bank’s home State even when cardholders live elsewhere. The ruling affirms the Comptroller’s authority to classify other card fees as interest, and it constrains states’ ability to block such charges for their residents.