BANKS AND BANKING - SALE - REGULATION OF BANK CREDIT CARD TRANSACTIONS.
Where the holder of a bank credit card (e.g., Firstbank card or BankAmericard) uses this credit card to purchase goods or service from a participating vendor, the transaction is governed by the regulatory provisions of the retail installment sales act pertaining to maximum service charges, collection of delinquency charges, information to be provided by sellers, etc., which apply to all transactions made under a "retail charge agreement" as defined therein.
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February 8, 1968
Honorable Alfred O. Adams
State Representative, 6th District
West 909 Melinda Lane
Spokane, Washington 99203
Cite as: AGO 1968 No. 6
We are writing in response to your recent request for an opinion relative to the applicability of certain provisions of the retail installment sales act (chapter 236, Laws of 1963, as amended by chapter 234, Laws of 1967) to the purchase of goods or services by the holders of bank credit cards. We paraphrase your question as follows:
Where the holder of a bank credit card (e.g., a Firstbank Card or a BankAmericard) uses this credit card to purchase goods or services from a participating vendor, is the transaction governed by the regulatory provisions of the retail installment sales act pertaining to maximum service charges, collection of delinquency charges, information to be provided by sellers, etc., which apply to transactions made under a "retail charge agreement" as defined therein?
We answer your question, as paraphrased, in the affirmative for the reasons set forth in our analysis.
While you have not specified any particular plans in your [[Orig. Op. Page 2]] letter, we have, in paraphrasing your question, made reference to the Firstbank Card plan and the BankAmericard plan. These are the two major bank credit card plans presently being operated in this state. The first of these plans has been operated for approximately two years by the Seattle First National Bank; the second plan has been in operation in the state of Washington for approximately the same period of time, under the auspices of two banks, the National Bank of Commerce and the Puget Sound National Bank.
In order to answer your question, it is first necessary that we set forth our understanding of the operation of these bank credit card plans. We are advised, initially, that the holder of a credit card issued pursuant to either plan may use the card in each of two distinct ways: (1) To purchase goods or services from a participating vendor; and (2) To borrow small amounts of money directly from the issuing bank. In this opinion, we will refer to transactions involving the first of these uses as "merchandise purchase" transactions, and to those involving the second of these uses as "cash advance" transactions.
With respect to merchandise purchase transactions, the issuing bank simply promises to pay to each of the vendors honoring its credit card the amount of each purchase of goods or services made by a card holder, less a specified discount. The card holder may either pay the bank in full for such purchases within twenty-five days of billing or, instead, he may pay the bank in monthly installments for purchases he makes through use of the card. These monthly payments are based on the total amount which is due and payable as of each billing date, and there is a fixed dollar limit on the total allowable outstanding balance. If the total amount billed is paid within twenty-five days of the billing date, there is no service charge. However, if the card holder chooses the installment method of payment, he must pay a monthly service charge based upon a percentage of the total outstanding balance.1/
[[Orig. Op. Page 3]]
By way of contrast, a card holder who desires to obtain a "cash advance" must deal directly with the issuing bank; here, there is no third party involved in the transaction. Under this use of the card, a card holder is able to obtain an instant cash loan from the bank without further credit investigation upon presentation of the card. For this service, a setup charge, in the form of a discount, is made in addition to assessment of the monthly service charge if the loan is not repaid in full within twenty-five days of billing.
It is this dual nature of the uses which may be made of these bank credit cards which somewhat complicates the matter of determining the applicable governing regulatory law. It seems quite clear, of course, that the retail installment sales act (chapter 236, Laws of 1963, as amended by chapter 234, Laws of 1967) has nothing whatsoever to do with transactions involving the loan of money; i.e., "cash advance" transactions. Instead, these transactions are covered by the provisions of RCW 19.52.020, which, as amended by the 1967 legislature (see § 4, chapter 23, Laws of 1967, Ex. Sess.), reads as follows:
"Any rate of interest not exceeding twelve percent per annum agreed to in writing by the parties to the contract shall be legal, and no person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater interest, sum or value for the loan or forbearance of any money, goods or things in action than twelve percent per annum: PROVIDED, That in any loan of money in which the funds advanced do not exceed the sum of five hundred dollars, a setup charge may be charged and collected by the lender, and such setup charge shall not be considered interest hereunder: PROVIDED FURTHER, That such setup charge does not exceed four percent of the amount of funds advanced, or [[Orig. Op. Page 4]] fifteen dollars, whichever is the lesser, except that on loans of under one hundred dollars a minimum not exceeding four dollars may be so charged."2/
However, even before the enactment of certain amendments to the retail installment sales act by the 1967 legislature, which we will note in a moment, it was somewhat doubtful whether this statutory prohibition against usurious interest rates (originally enacted as § 2, chapter 80, Laws of 1899) could also be said to be applicable tomerchandise purchase transactions involving the use of bank credit cards. This doubt existed because of the case of Hafer v. Spaeth, 22 Wn.2d 378, 156 P.2d 408 (1945), in which the Washington court held that this statute (RCW 19.52.020, supra) did not apply to the ordinary purchase of merchandise on a time payment installment contract unless it was evident that the particular transaction was actually a cloak to hide a usurious loan.
In arriving at this conclusion, the court spelled out the necessary elements of usury, within the purview of the statute, as follows:
"The essential elements of usury are: (1) a loan or forbearance, express or implied; (2) money or its equivalent constituting the subject matter of the loan or forbearance; (3) an understanding between the parties that the principal shall be repayable absolutely; (4) the exaction of something in excess of what is allowed by law for the use of the money loaned or for the benefit of the forbearance; and, in some jurisdictions, (5) an intent to exact more than the legal maximum for the loan or forbearance.
". . .
"The substructure of a usurious transaction is found in the first two elements above enumerated. To constitute usury there must be a loan or forbearance of money or its equivalent, and where there is no such loan or forbearance there can be no usury. . . ."
[[Orig. Op. Page 5]]
Thus, according to this decision, money or its equivalent, and not mere abstract credit, must be the subject of a loan in order for the usury law to apply. For this reason, the ruling would appear to exclude not only installment contract purchases of merchandise but, as well, purchases made on the basis of the common two-party revolving credit plans, from the application of RCW 19.52.020, supra.3/ And obviously, if this logical extension of the court's decision inHafer were accepted, it would become most difficult to find any real basis for reaching a different conclusion in the case of the three party credit card plans such as we are now considering.
However, we need not consider this point any further, for we believe that the matter has now been resolved by the legislature, through its enactment of chapter 234, Laws of 1967. Simply stated, we find in this 1967 amendment to the retail installment sales act what seems to us to be a satisfactory indication of legislative intent that the regulatory provisions of the act, which have clearly applied since the outset to transactions involving bipartite retail charge agreements, now are to be applicable as well to transactions involving three party agreements, including the three party bank credit card plans such as we here have before us.
As originally enacted, § 1 of the 1963 retail installment sales act (RCW 63.14.010) contained a number of definitions of terms used in the substantive regulating provisions of the act, including the following:
"(5) 'Retail installment transaction' means any transaction in which a retail buyer purchases goods or services from a retail seller pursuant to a retail installment contract or a retail charge agreement, as defined in this section, which provides for a service charge, as defined in this section, and under which the buyer agrees to pay the unpaid balance in one or more installments;
"(6) 'Retail installment contract' or 'contract' means a contract, other than a retail charge agreement or an instrument reflecting a sale made pursuant thereto, entered into or performed in this state for a retail installment transaction. . . .
[[Orig. Op. Page 6]]
"(7) 'Retail charge agreement,' 'revolving charge agreement' or 'charge agreement' means an agreement entered into or performed in this state prescribing the terms of retail installment transactions which may be made thereunder from time to time and under the terms of which a service charge, as defined in this section, is to be computed in relation to the buyer's unpaid balance from time to time;
". . ."
These definitions have not been altered by the 1967 amendment. Notably, the terms "retail installment contract" and "retail charge agreement," are, by definition, mutually exclusive terms. The former term designates the contract for a single "retail installment transaction," whereas the latter covers revolving credit agreements which contemplate a number of recurring retail installment transactions made pursuant to the terms of a single agreement such as is the case with respect to both the common two-party (buyer-seller) credit card plans and the three party bank credit card plans here under consideration. Thus, the question to be determined is simply whether these three party agreements, which are initiated by the issuing bank rather than by the seller of the goods or services, are now covered by the regulatory provisions of the act in the same manner as the two-party agreements.
The operative provisions of the retail installment sales act in so far as it regulates retail charge agreement transactions are principally to be found in the following code sections: RCW 63.14.090 (delinquency or collection charges); RCW 63.14.120 (retail charge agreements information to be furnished by seller); and RCW 63.14.130 (service charge, composition, other fees and charges prohibited). See, also, RCW 63.14.140 and 63.14.150, and various other general provisions applying to both retail installment contracts and retail charge agreement transactions. We shall note one of these general provisions RCW 63.14.180 in more detail in a moment.
However, first, let us note the references which appeared in RCW 63.14.090 and 63.14.120, to, respectively, "holders" and "sellers." RCW 63.14.090, which was not amended by the 1967 act, reads as follows:
"The holder of any retail installment contract or retail charge agreement may not [[Orig. Op. Page 7]] collect any delinquency or collection charges, including any attorney's fee and court costs and disbursements, unless the contract or charge agreement so provides. In such cases, the charges shall be reasonable, and no attorney's fee may be recovered unless the contract or charge agreement is referred for collection to an attorney not a salaried employee of the holder.
"The contract or charge agreement may contain other provisions not inconsistent with the purposes of this chapter, including but not limited to provisions relating to refinancing, transfer of the buyer's equity, construction permits and title reports."
RCW 63.14.120, whichwas amended (see, § 7, chapter 234, Laws of 1967) reads as follows:
"(1) At or prior to the time a retail charge agreement is made the seller shall advise the buyer in writing, on the application form or otherwise, or orally that a service charge will be computed on the outstanding balance for each month (which need not be a calendar month) or other regular period agreed upon, the schedule or rate by which the service charge will be computed, and that the buyer may at any time pay his total unpaid balance: PROVIDED, That if this information is given orally, the seller shall, upon approval of the buyer's credit, deliver to the buyer or mail to him at his address, a memorandum setting forth this information.
"(2) The seller or holder of a retail charge agreement shall promptly supply the buyer with a statement as of the end of each monthly period (which need not be a calendar month) or other regular period agreed upon, in which there is any unpaid balance thereunder, which statement shall set forth the following:
"(a) The unpaid balance under the retail charge agreement at the beginning and at the end of the period;
"(b) Unless otherwise furnished by the seller [[Orig. Op. Page 8]] to the buyer by sales slip, memorandum, or otherwise, a description or identification of the goods or services purchased during the period, the cash sale price and the date of each purchase;
"(c) The payments made by the buyer to the seller and any other credits to the buyer during the period;
"(d) The amount, if any, of any service charge for such period; and
"(e) A legend to the effect that the buyer may at any time pay his total unpaid balance.
"(3) Every retail charge agreement shall contain the following notice in ten point bold face type or larger directly above the space reserved in the charge agreement for the signature of the buyer: NOTICE TO BUYER:
"(a) Do not sign this retail charge agreement before you read it or if any spaces intended for the agreed terms are left blank.
"(b) You are entitled to a copy of this charge agreement at the time you sign it.
"(c) You may at any time pay off the full unpaid balance under this charge agreement.
"(d) The monthly service charge may not lawfully exceed the greater of 1 1/2% of the outstanding balance (18% per year computed monthly) or one dollar.
"(e) You may cancel any purchases made under this charge agreement and return the goods so purchased, if the seller or his representative solicited in person such purchase, and you sign an agreement for such purchase, at a place other than the seller's business address shown on the charge agreement, by sending notice of such cancellation by certified mail return receipt requested to the seller at his address shown on the charge agreement, which notice shall be posted not later than the next business day [[Orig. Op. Page 9]]following your signing of the purchase agreement: PROVIDED, That at the time of sending notice of rescission you have not received and accepted a substantial part of the goods or services which you agreed to purchase." (New language underscored.)
Thus, we see that the "holder" of a retail charge agreement may be a person other than the seller of the goods or services involved in a particular retail installment transaction consummated under the provisions of such an agreement. Specifically, subsection (2) of the second statute above quoted, which makes reference to "the selleror holder of the retail charge agreement," requires that such person supply the buyer with an up-to-date statement at the end of each monthly period. This reference would seem to clearly indicate that the legislature understood that the creditor under a retail charge agreement might, in fact, be someone other than the seller.
Without anything further it might, of course, be argued that these references to "seller or holder" which also appear in the original act take cognizance only of the case of a "holder" who becomes a creditor by assignment of a receivable from the original seller.4/ Such a conclusion would definitely have been possible prior to passage of the legislature's 1967 amendments to the act. However, let us now look closely at RCW 63.14.180 a general provision applicable to both retail installment contracts and retail charge agreements, to which we have previously alluded.
This section was originally enacted as § 18, chapter 236, Laws of 1963. However, by § 10, chapter 234, Laws of 1967, the legislature amended this provision as follows:
seller)) who enters into a retail installment (( any)) contract or charge agreement which does not comply with the provisions of this chapter or who violates any provision of this chapter except as a result of an accidental or bona fide error shall be barred from the recovery of any service charge, [[Orig. Op. Page 10]] official fees, or any delinquency or collection charge under or in connection with the related retail installment contract or purchases under a retail charge agreement; but such person (( the seller)) may nevertheless recover from the buyer an amount equal to the cash price of the goods or services and the cost to such person (( the seller)) of any insurance included in the transaction : PROVIDED, That if the service charge is in excess of that allowed by section 8 of this 1967 amendatory act, except as the result of an accidental or bona fide error, the buyer shall be entitled to an amount equal to the total of (1) twice the amount of the service charge paid, and (2) the amount of the service charge contracted for and not paid, plus (3) costs and reasonable attorneys' fees. The reduction in the cash price by the application of the above sentence shall be applied to diminish pro rata each future installment of principal amount payable under the terms of the contract or agreement."
Again, we have underscored the new language and indicated the deleted language by double parenthesis. The crucial point we see in the amendment is that the legislature, by broadening this remedial provision to include any person (and not merely, as before, any seller) who enters into a retail installment contract or charge agreement which is not in compliance with the act, seemingly recognized that a person other than a seller might initially enter into such a contract or agreement; it then determined that such person should also be subject to the penalties prescribed for a violation of the act including the penalty set forth in the proviso for making an excessive service charge.5/
We have already seen that the legislature, by § 7, chapter 234, Laws of 1967, amending RCW 63.14.120, specified that every retail charge agreement entered into after the effective [[Orig. Op. Page 11]] date of the 1967 amendatory act6/ must contain, among other provisions, a statement that "the monthly service charge may not lawfully exceed the greater of one and one half percent of the outstanding balance (eighteen percent per year computed monthly) or one dollar." In addition, by § 8 of the 1967 amendment, the legislature enacted the following specific provision with respect to the maximum service charge which may be made in a retail charge agreement:
"(2) The service charge in a retail charge agreement, revolving charge agreement or charge agreement, shall not exceed one and one half percent per month on the outstanding unpaid balances. If the service charge so computed is less than one dollar for any month, then one dollar may be charged."
In summary form, our conclusion with respect to the matter is as follows:
(1) Prior to the enactment of this, and the other 1967 amendments which we have noted, it could, perhaps, have been argued that in the case of three party bank credit card plans, both cash advance transactions and merchandise purchase transactions were governed, with respect to maximum service charges, by the twelve percent per annum ceiling imposed by RCW 19.52.020, supra. However, such an argument, in the case of merchandise purchase transactions, would have had to overcome the reasoning and conclusion of our court in Hafer v. Spaeth, supra, which apparently excluded all retail installment purchase transactions from the purview of this statute.
(2) On the other hand, emphasizing the analogous situation which was involved in theHafer case, it could, as well, have been argued that there was nostatutory ceiling on the service charges which a bank might make in connection with these "merchandise purchase" transactions.7/
[[Orig. Op. Page 12]]
(3) However, for the reasons above indicated, it is clear, in our opinion, that these transactions are now governed by the regulatory provisions of the retail installment sales act, as amended including those regulatory provisions which pertain to maximum service charges (§ 8, supra), collection of delinquency charges (RCW 63.14.090,supra), and information to be provided by sellers, etc. (§ 7,supra).
We trust the foregoing will be of assistance to you.
Very truly yours,
JOHN J. O'CONNELL
PHILIP H. AUSTIN
Assistant Attorney General
*** FOOTNOTES ***
1/Thus, in brief summary, it is to be seen that the main features of merchandise purchase transactions involving the use of the bank credit card plans are:
(1) Title to the goods (in the case of merchandise) passes directly from the merchant to the card holder;
(2) Payment for the items purchased is owed by the card holder to the bank only (assuming that the purchases are within the scope of the card holder agreement); and
(3) The bank by its promise must pay the merchant for all such purchases.
2/We understand that the two provisos, which were added to this statute by the 1967 amendment, were specifically designed to deal with the above described setup charges levied in connection with "cash advances" involving the use of bank credit cards. See, AGO 1968 No. 1, copy enclosed.
3/Examples of these two-party cards are those which have been issued by such firms as Sears Roebuck & Co., J. C. Penney Co., and other retailers by which they extend continuing credit to their prospective customers.
4/This was the view taken by the Oregon attorney general in his recent opinion dealing with this same subject (Opinion No. 6250, dated March 8, 1967) in response to a contention that bank credit card merchandise purchases were covered by the Oregon counterpart of our retail installment sales act.
5/We note, in connection with our reference to the recent opinion of the Oregon attorney general, footnoted above, that the Oregon counterpart to this section (ORC 83.170) [[ORS 83.170]]retains the original language of this provision, and thus still applies to sellers only.
6/January 1, 1968, pursuant to § 17 thereof.
7/In Hafer the court concluded that, in the absence of a statutory ceiling on permissible service charges, the test of legality was simply one of reasonableness. Of the particular agreement before it, the court said:
". . . In the absence of fraud, misrepresentation, or mistake, the agreement was binding upon the parties, and the handling charge would be enforcible [[enforceable)]]as a part of that agreement, unless, as such charge, it was found to be an unconscionable exaction. . . ."