The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5605

December 5, 1979

BANKS AND BANKING:

Bank credit cards

INTEREST:

Charges incidental to issuance of a bank credit card

A reasonable annual fee imposed by a bank in connection with the issuance of a credit card is not a charge on a loan.

Honorable Jerome Hart

State Senator

The Capitol

Lansing, Michigan

You have requested my opinion on whether a bank may impose an annual fee in connection with the issuance of a credit card. The credit card service is part of an international network in which many banks are authorized to offer the cards to their customers. The card is recognized by merchants who agree to accept it as payment for goods and services provided to cardholders. Customers using such cards are charged interest computed on the basis of monthly unpaid balances. The annual fee is proposed to be charged to holders irrespective of the use of the card and is a condition precedent to issuance or renewal of cards to bank customers. The precise question posed is:

'. . . whether or not such proposed annual membership fee constitutes 'interest and charges' on loans under Section 191 of the Michigan Banking Code of 1969.'

Section 191 of the Michigan Banking Code, 1969 PA 319, MCLA 487.491; MSA 23.710(191), provides that banks may collect interest and charges on loans in the following manner:

'(a) On any loan made pursuant to an existing credit card arrangement or other agreement existing prior to such 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 a combined amount of not to exceed 1.5% of the unpaid balance per month.'

Bank credit cards represent a pre-approved line of credit upon which the customer can draw to either purchase goods from participating merchants or secure cash. Generally, the bank will provide the customer with a monthly statement which sets forth the transactions involving use of the card during the period. The customer is given a term in which to make payment. If less than complete payment is made, the balance is carried over to the succeeding month, upon which a finance charge is added to the preceding balance.

The answer to your question depends on whether the 'annual membership fee' constitutes a charge on a loan. If so, then such charges must be added to any interest or finance charge imposed on the customer to determine whether the combined interest and charges exceed the statutory maximum. Furthermore, such a conclusion may cause the arrangement to be violative of Section 1(a) of the usury statute, 1966 PA 326, as amended by 1978 PA 27, MCLA 438.31a; MSA 19.15(1a), which permits state and national banks to require a borrower to pay reasonable and necessary charges which are the actual expenses incurred by the lender in connection with the making, closing, disbursing, extending, readjusting, or renewing of a loan. Such charges are deemed not to be interest but may only be exacted once from the borrower, not annually, as contemplated by the bank in question.

The Michigan courts have dealt with schemes designed to evade state usury laws. See Wilcox v Moore, 354 Mich 499; 93 NW2d 288 (1959). See also, OAG, 1975-1976, No 5085, p 715, 717 (December 16, 1976). However, the nature of the bank credit card transaction is such that no loan is made at the time the card is applied for or approved and issued by the bank. All the recipient receives is the authorization to use the card, either to purchase goods and services or to receive cash advances. No loan is made and no interest can commence to run until the card is actually used and an unpaid balance maintained. The fee imposed in connection with the issuance of the card is similar to a commitment fee often charged in connection with the approval of a loan which binds the bank to make a loan at some future date at a specified rate.

In State of Illinois v Continental Illinois National Bank and Trust Co of Chicago, 409 F Supp 1167 (N.D., Ill, E.D., 1975), aff'd in part and reversed on other grounds, 536 F2d 176 (CA 7, 1976), cert den 429 US 871 (1976), the United States District Court had occasion to review the use of bank credit cards and recognized that the act of applying for the issuing the card does not constitute the making of a loan. The court described such transactions as follows:

'The contracts underlying the issuance of credit cards with respect to cash advances are, in effect, agreements to make small loans to the customer at some future presentation of a valid card. That agreement does not transfer any funds and therefore is not a loan as urged by defendants. Nor is interest charged with the opening or establishing of a line of credit. The funds are transferred and interest commences when the CBCT disburses the requested number of $25 packets up to $100.00. That is when and where the loan is made. Many holders of bank credit cards never use them to obtain funds and, therefore, never make any loans with them although the line of credit is available.

It is not accurate, therefore, to contend that the establishment of the line of credit constitutes the making of the loan . . .'

(emphasis added)

409 F Supp at 1178

In Key v Worthen Bank & Trust Co, N. A., 260 Ark 725, 729, 730; 543 SW2d 496, 498, 499 (1976), the Arkansas Supreme Court reviewed the precise question which you raise. The court therein held that the annual membership fee was not interest or a charge on a loan because the fee 'was not imposed in connection with receiving a loan from Worthen or with any specific extension of credit.' The court further recognized the utility of bank credit cards and compared such to the use of travelers checks, for which a charge is normally connected. The court concluded that while it would not permit a service charge to be 'a mere shell to conceal the kernel of usury,' the fee connected with the issuance of the bank credit card was valid consideration paid for a valuable bank service.

The Federal Reserve Board has also considered whether a membership fee imposed in connection with the issuance, maintenance, and renewal of a credit card constitutes a finance charge. The federal definition of 'finance charge,' found at 15 USC Sec. 1605, includes the 'sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit. . . .' In holding that such fees are not finance charges, the Board ruled, at 12 CFR Sec. 226.407; Fed Reg, Vol 36, No. 161, p 16050 (August 19, 1971), that:

'(b) Since such fees are imposed as a qualification of membership in the plan and for the issuances of a credit card, and not as incident to or as a condition of any specific extension of credit, they do not fall within the definition of a 'finance charge' under Section 226.4(a) of Regulation Z.'

In view of these authorities, it is my opinion that a state chartered bank may impose an annual membership fee in connection with the issuance of a bank credit card and that such a fee does not constitute a charge in connection with a loan. However, I caution that such fees cannot be used as a subterfuge to exact additional interest from prospective borrowers. Should it appear that the amount of the membership fees are excessive or otherwise unrelated to actual and identifiable costs, it may be necessary to re-examine the nature of fees in light of existing usury, anti-trust, and consumer protection legislation.

Frank J. Kelley

Attorney General