Smiley v. Citibank, 517 U.S. 735 (1996), is a U.S. Supreme Court decision upholding a regulation of the Comptroller of Currency which included credit card late fees and other penalties within the definition of interest and thus prevented individual states from limiting them when charged by nationally-chartered banks.

The decision, which had begun as a class action in California, was seen as a victory for banks and credit-card issuers, who could mostly charge late fees as they pleased.

In 1980, Citibank took advantage of that decision and moved its money-losing credit-card operations to South Dakota, after persuading that state's legislature and governor to repeal its anti-usury law.

Other states and banks followed the example, and by 1990 the number of credit cards in circulation had doubled, while the average household's revolving balance increased more than fivefold.

Consumer advocates complained that some issuers were using late fees of $5 or $10, charged if a single month's payment was even one day overdue, to gouge extra profits from customers who might otherwise be borrowing and spending responsibly.

[3] Citibank responded to Smiley's original filing with a motion to dismiss on the grounds that late fees were interest covered by the National Banking Act.

On March 3, 1995, after the Superior Court had dismissed the complaint, the Office of the Comptroller of Currency (OCC), the official charged by the National Banking Act with regulating national banks, issued a proposed regulation defining "interest" under the Act as including "any payment compensating a creditor or prospective creditor ... [for] any default or breach by a borrower of a condition upon which credit was extended."

Late fees, he said, were not interest whatever the Comptroller's regulation said since they were fixed amounts and did not vary based on the money owed or schedule of payments.

The cases from New Jersey and California, he uncharacteristically[8] agreed, made it "difficult indeed to contend that the word 'interest' in the National Bank Act is unambiguous with regard to the point at issue here.

[14] Lawyers and lobbyists for the credit-card industry, who had feared costly litigation and a myriad of state laws if the Court ruled against OCC, praised the decision.

"[3] On the other side, Donovan described the result as "an unfortunate interpretation ... that will allow small states to override the longstanding consumer protection laws of more heavily populated ...

I don't think that the answer the U.S. Supreme Court came up with is going to be the long-term resolution of the problems posed by old laws trying to deal with new and very changed banking practices.

However, it did show him that he'd underestimated the role played by a regulatory body that, as Chief Justice Rehnquist had said during oral argument, had never come before the Court with a regulation that wasn't favorable to the banking industry.