When a credit card issuer decides to impose a discretionary rate increase on a consumer cardholder because of the consumer's default, do the Truth in Lending Act and Regulation Z require delivery of a notice to the consumer before the effective date of the change? That is the question put to the U. S. Court of Appeals for the Ninth Circuit in James A. McCoy's appeal from a District Court ruling (James A. McCoy et al v. Chase Manhattan Bank, USA, NA).
In the case put before the court, Chase Manhattan Bank, USA, NA, had used a cardholder default provision in its credit card agreement to increase the interest rate on McCoy's account. Notice of the increased rate was included on a periodic statement, but the increase was retroactive to the beginning of the statement period. McCoy sued Chase for Truth in Lending violations, arguing that the notice was required before or contemporaneous to the effective date of the increased rate, and that the retroactive increase violated that notice requirement.
Both the majority opinion in McCoy's favor and the dissent illustrate the requirement that federal courts must defer to an agency's interpretation of its own regulation except when the interpretation is plainly erroneous or inconsistent with the regulation. In this case, the three-judge panel could not agree on how to interpret the Federal Reserve Board's Official Staff Commentary, and disagreed on what deference, if any, it should give to the Fed's wording of its 2007 Advance Notice of Proposed Rulemaking. In that ANPR, the Fed summarized its understanding of existing law and regulation relating to notices and discretionary rate increases, and proposed Regulation Z amendments to increase notice requirements for rate increases to 45 days. The court did note that the Fed eliminated any ambiguity on a going-forward basis when its final amendments were issued on January 29, 2009 (effective July 1, 2010).
The court found that Chase was required to give McCoy notice of an increased interest rate based on McCoy's default, and that the notice must be given prior to imposition of the increased rate. McCoy did receive notice, but it was too late, said the court.
The decision reversed the District Court's finding that McCoy did not have a valid Truth in Lending claim against Chase, and remanded the case to the lower court. Also reversed were dismissals of four of McCoy's six claims against Chase under Delaware law.
Although Regulation Z has been amended effective 7/1/2010 to require advance disclosure of rate increases for defaults, card issuers with existing contract provisions permitting such rate increases should carefully review the McCoy case with counsel to determine whether their notice practices might run afoul of the principles set out by the Ninth Circuit, which affect rate increases imposed until the Regulation Z amendent is effective.
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