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Consumers pay billions in fees, yet banks and credit card companies claim it's not helping their bottom line.

The history of fees

Why we pay fees: The history of fees

In olden days, financial institutions offered fewer services than today and not many people had credit cards. A couple of key Supreme Court rulings changed everything -- first paving the way for a consumer society fueled by plastic and then unleashing the fees.

Before 1978, national banks were prohibited from charging interest rates that exceeded state laws. Lenders could charge only what was allowed by state regulation. For instance, a New York-based bank making a loan to someone in Missouri could charge them interest based on Missouri's limits, not New York's. Certain regulations protected community banks and forced national lenders to contend with 50 different rules regarding the imposition of interest charges. A Supreme Court decision transformed the way national banks did business and started the trend toward interest rate deregulation.

Timeline for the history of fees
1950 First credit card: Diner's Club Card
1978 Landmark ruling: Credit card companies can set interest rates as high as they want, within limits set by the state in which they're headquartered.
1980 Congress begins deregulation of the banking industry. Leads to the diversifying of services offered by banks as well as the kafuffle known as the savings and loan crisis.
1996 Landmark ruling: Fees go national, and the sky's the limit.
2006 A study by the U.S. GAO finds credit card fees rampant. Further, it finds that consumers don't understand the legal language in disclosures that reveal what the fees are and how they're incurred.
2007 Credit card reform bills are introduced -- in the House and the Senate that would regulate the industry and place limits on penalty interest and fees.

1978: In Minneapolis v. First of Omaha Service Corp., the Supreme Court basically revolutionized the banking and credit card landscape by ruling that national banks actually could export interest rates across state lines. They came to this conclusion after examining Section 85, the clause that governs interest charges, of the National Bank Act, which established a national banking system in 1864. Shortly after the ruling, big banks began packing their bags for states such as Delaware and South Dakota, which have no ceiling on interest rates.

1980: After that, state-chartered banks began clamoring for looser lending standards and higher caps on interest rates from their legislatures. Inflation and rising interest rates collided to lead to changes. After Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980, smaller banks and savings and loans were less constrained on how much interest they could charge on loans and also could pay higher interest rates on their deposit accounts. The act effectively sought to negate the advantage that national banks held over the community banks so that they could keep money in the form of deposits in addition to getting in on the credit card game. An FDIC paper, "The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs and the Personal Bankruptcy Rate," says it was at this point that consumer-debt levels began to rise, as did personal bankruptcies.

1996: Fees always existed but it wasn't until 1996 that they really came into their own. In that year the Supreme Court ruled on another landmark case, Smiley v. Citibank. Court papers show that Barbara Smiley held two Citibank credit cards on which she was charged late fees allowable by South Dakota law. The California resident thought the fees shouldn't be permitted across state lines. The question the court considered was whether "fees" represented interest charges as allowed by Section 85 of the National Bank Act in the court's earlier interpretation. They ruled that, yes, fees should be included with the term interest, which meant that fees and penalty interest could basically be whatever the bank's home state would allow.

-- Posted: June 11, 2007
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