APPEAL FROM THE ORDER OF JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.
Aldisert, Weis and Garth, Circuit Judges.
On this appeal, we are called upon to decide: (1) which of two arguably applicable statutes governs the rate of interest which national banks in Pennsylvania may charge on revolving credit card accounts;*fn1 and (2) whether the applicable Pennsylvania law allows the defendant banks to charge "interest-on-interest" in connection with such accounts. The district court held that the defendant banks could charge the 15% rate authorized by the Pennsylvania Goods and Services Installment Sales Act (hereinafter, "Sales Act"), rather than being limited to the 12% maximum rate established by the Pennsylvania Banking Code (hereinafter, "Banking Code"); and, that compound interest could be charged on the delinquent accounts. We agree with the district court that defendants may charge the higher interest rate (15%) authorized by the Sales Act. We do not agree that the Sales Act authorizes "interest-on-interest", and to that extent, we reverse.
Defendants, Provident National Bank (hereinafter, "Provident") and Philadelphia National Bank (hereinafter "PNB") are national banks organized under the National Bank Act 12 U.S.C. § 21 et seq., with offices in Philadelphia.*fn2 For a period of years preceding the filing of this complaint, both banks operated revolving bank credit card plans. The "Master Charge" and "BankAmericard" credit plans are commonly referred to as "revolving credit" plans because of their unique features. A description of the chain of events involved in their issuance and use is helpful to an understanding of the issues presented in this case.
A person desiring to become a credit card holder of Provident Master Charge or PNB BankAmericard generally completes a written application and submits it to the bank for whose plan he is applying. Upon approval of the application, a written agreement is sent to the applicant and he is issued a Master Charge or BankAmericard credit card with his name and account number. The cardholder agreements set forth the terms and conditions governing the use of the card, including the maximum amount of credit which the cardholder may have outstanding at any one time.
Under the cardholder agreement, an account is established at the bank on behalf of each cardholder who is then permitted (a) to borrow money from the bank through cash advances and (b) to purchase merchandise from various member merchants who have agreed with a bank operating a Master Charge or BankAmericard plan to honor the credit card, provided that the sum of borrowings and credit purchases does not exceed the maximum limit established. PNB also imposes a separate maximum limitation on cash advances. Both the Master Charge and the BankAmericard cardholder agreements provide that the Annual Percentage Rate imposed on the outstanding balances arising from the purchase of merchandise shall be fifteen percent (15%).
When a cardholder utilizes his card to purchase merchandise, he presents the card to the merchant at the time the purchase is made. The merchant imprints the sales slip describing the merchandise with the cardholder's number. The merchandise and a copy of the sales slip are given to the cardholder.
The member merchant presents the sales slip to Provident or PNB. The amount shown on the sales slip, (less a percentage set by agreement between Provident or PNB and the merchant), is paid to the merchant, or credited to the merchant's account.*fn3
Both Master Charge and BankAmericard are operated on the basis of billing cycles. The last day of the billing cycle is referred to as the "billing date", which is the same date of each month for each individual cardholder. The day immediately following the billing date is the first day of the next billing cycle. There are 12 billing cycles per calendar year. Provident's Master Charge billing system and PNB's BankAmericard billing system are processed by computer. Although transactions such as payments, credits and new charges to accounts are processed as the slips are received by Provident or PNB respectively, actual computations in the accounts, including calculation of finance charges, are made only once each billing cycle on the billing date.
On the billing date all transactions posted to an account during that billing cycle [ e.g., purchases, payments and credits] are reviewed by the computer. The finance charge, if any, is then calculated and imposed, and a summary of the resulting information is printed by computer on a statement [the "monthly statement"]. The monthly statement is mailed to the cardholder within a day or two after the billing date.
On the first billing date subsequent to the receipt of sales slips by Provident or PNB, the amounts and dates of new purchases are recorded on the monthly statement and the total of the new purchases is included on the statement as a part of the amount shown under the heading "New Balance". The remainder of the amount shown under the heading "New Balance" consists of previously outstanding balances*fn4 less applicable payments and credits.
No charges are imposed on purchases when they first appear on the periodic statement as new charges. If the cardholder pays the entire outstanding balance of his account before his next billing date [a period of about 25 days] he will incur no charges on those new purchases. This feature is known as the "free ride" period. Some Master Charge and BankAmericard cardholders pay their entire outstanding balances each month and never incur any charges.
If the cardholder fails to pay the entire outstanding balance, a charge will be imposed on those purchases, but it will be computed only from the billing date on which the purchases first appeared on the monthly statement, and not from the date of the actual purchase. Whenever a cardholder fails to make a timely monthly payment, both Provident and PNB impose a finance charge on a balance which includes the unpaid finance charge imposed in the previous cycle. Thus, both banks admit that they have charged compound interest on delinquent accounts.
Plaintiffs Dabrow and Acker have been BankAmericard cardholders since November 5, 1966 and March 11, 1970 respectively, and both have used their BankAmericard credit cards only for purchases of merchandise. Dabrow has been a Master Charge cardholder since June 1970 and has used his Master Charge Credit Card only for the purchases of goods and services.
Plaintiffs commenced this action as a class action in November 1972.*fn5 Thereafter both plaintiffs and defendants moved for summary judgment*fn6 as to all six counts of the Complaint.*fn7 On February 27, 1974, the district court held that its jurisdiction was properly invoked, and granted the defendants' motions.*fn8 Plaintiffs appeal only from the grant of summary judgment in favor of the defendants as to count one (alleging excessive interest charges) and count four (alleging the charging of "interest-on-interest").*fn9
II. BANK CODE (12%) OR SALES ACT (15%)
The rate of interest which can be charged by a national bank is governed by 12 U.S.C. § 85.*fn10 In effect, the National Bank Act "defers" to the laws of the state in which a national bank is located to establish the interest rate which the national bank can charge. Pennsylvania, however, has two different "interest rate" statutes, each of which is arguably applicable to bank operated revolving credit card plans. Section 309 of the (Pennsylvania) Banking Code of 1965, 7 P.S. § 309, provides for a rate not to exceed one percent (1%) per month, or twelve percent (12%) per year on the actual outstanding balance.
Installment loans (including revolving credit plans)
(a) Maximum rate -- An institution may make a charge for an installment loan which complies with the requirements of this section, at a rate not in excess of six dollars ($6) per one hundred dollars ($100) per annum computed on the original principal amount for the period of the loan. If such loan is one of a series of loans under an agreement ("revolving credit plan") providing a maximum outstanding balance of all such loans at any time, the institution may make a charge at a rate not in excess of one per cent per month on the actual outstanding balance of the loan.
Section 1904 of the (Pennsylvania) Goods and Services Installment Sales Act provides for an interest rate on retail installment accounts not to exceed one and one-quarter percent (1 1/4%) per month or fifteen percent (15%) per year.
Rates of service charge on accounts
Subject to the other provisions of this article the seller or holder of a retail installment account may charge, receive and collect the service charge authorized by this act. The service charge shall not exceed the following ...