The Supreme Court of the United States recently held that, under the
version of Regulation Z applicable at the time of the relevant
transactions, TILA did not require a credit card issuer to provide the
credit card holder with a change-in-terms notice before implementing a
provision in the cardholder agreement allowing the bank to raise the card
holder's interest rate, up to a pre-set maximum, following the card
holder's delinquency or default.
A copy of the opinion can be found at:
http://www.supremecourt.gov/opinions/10pdf/09-329.pdf
http://www.supremecourt.gov/opinions/10pdf/09-329.pdf
As you may recall, in January 2009, the Board promulgated a final rule,
scheduled to be effective July 1, 2010, which among other things included
a new provision, §226.9(g), which requires 45 days' advance notice of
increases in rates due to cardholder delinquency or default, or as a
penalty, including penalties for "events specified in the account
agreement, such as making a late payment . . . ."12 CFR
§226.9(g)(1)(2010). In May 2009, Congress enacted the Credit Card
Accountability Responsibility and Disclosure Act (Credit CARD Act). The
Credit CARD Act amended TILA, in relevant part, to require 45 days'
advance notice of most increases in credit card annual percentage rates.
15 U. S. C. §1637(i). Because the Credit CARD Act's notice requirements
with respect to interest-rate increases largely mirrored the requirements
in the new version of the new regulation, the Board changed the effective
date of those requirements to August 20, 2009, to coincide with the
statutory schedule. The transactions giving rise to the dispute at issue
in this case arose prior to enactment of the Credit CARD Act and the
promulgation of the new regulatory provisions.
scheduled to be effective July 1, 2010, which among other things included
a new provision, §226.9(g), which requires 45 days' advance notice of
increases in rates due to cardholder delinquency or default, or as a
penalty, including penalties for "events specified in the account
agreement, such as making a late payment . . . ."12 CFR
§226.9(g)(1)(2010). In May 2009, Congress enacted the Credit Card
Accountability Responsibility and Disclosure Act (Credit CARD Act). The
Credit CARD Act amended TILA, in relevant part, to require 45 days'
advance notice of most increases in credit card annual percentage rates.
15 U. S. C. §1637(i). Because the Credit CARD Act's notice requirements
with respect to interest-rate increases largely mirrored the requirements
in the new version of the new regulation, the Board changed the effective
date of those requirements to August 20, 2009, to coincide with the
statutory schedule. The transactions giving rise to the dispute at issue
in this case arose prior to enactment of the Credit CARD Act and the
promulgation of the new regulatory provisions.
The Supreme Court held that the Regulation Z rules were not clear on
whether a change to an interest rate that resulted from a previously
disclosed provision in a contract would require disclosure. The U.S.
Supreme Court deferred to the Federal Reserve, which in its amicus brief
argued that the bank was not required to give the borrower notice under
the version of Regulation Z that was in effect at the time.
whether a change to an interest rate that resulted from a previously
disclosed provision in a contract would require disclosure. The U.S.
Supreme Court deferred to the Federal Reserve, which in its amicus brief
argued that the bank was not required to give the borrower notice under
the version of Regulation Z that was in effect at the time.
Plaintiff ("Debtor") was the holder of a card issued by creditor Chase
Bank ("Chase"). The cardholder agreement between the parties provided, in
relevant part, that Debtor was eligible for "preferred rates," but that to
keep those rates Debtor had to meet certain conditions. If any conditions
in the credit agreement were not met, Chase reserved the right to "change
Debtor's interest rate and impose a non-preferred rate up to the maximum
non-preferred rate described in the pricing schedule" and to apply any
changes "to existing as well as new balances … effective with the billing
cycle ending on the review date." Debtor brought suit against Chase,
alleging that Chase violated Regulation Z because Chase increased Debtor's
interest rate "due to his delinquency or default" and did not notify
Debtor of the increase until after it had taken effect.
Bank ("Chase"). The cardholder agreement between the parties provided, in
relevant part, that Debtor was eligible for "preferred rates," but that to
keep those rates Debtor had to meet certain conditions. If any conditions
in the credit agreement were not met, Chase reserved the right to "change
Debtor's interest rate and impose a non-preferred rate up to the maximum
non-preferred rate described in the pricing schedule" and to apply any
changes "to existing as well as new balances … effective with the billing
cycle ending on the review date." Debtor brought suit against Chase,
alleging that Chase violated Regulation Z because Chase increased Debtor's
interest rate "due to his delinquency or default" and did not notify
Debtor of the increase until after it had taken effect.
The district court dismissed Debtor's complaint, "holding that because the
increase did not constitute a 'change in terms' as contemplated by
§226.9(c), Chase was not required to notify him of the increase before
implementing it." The Ninth Circuit reversed, holding that "because the
credit agreement does not alert Debtor to the 'specific change' that will
occur if he defaults, Chase was obliged to give notice of that change
prior to its effective date." The First Circuit resolved the same
question in favor of Chase, the Supreme Court resolved the circuit split
and reversed the decision of the Ninth Circuit.
increase did not constitute a 'change in terms' as contemplated by
§226.9(c), Chase was not required to notify him of the increase before
implementing it." The Ninth Circuit reversed, holding that "because the
credit agreement does not alert Debtor to the 'specific change' that will
occur if he defaults, Chase was obliged to give notice of that change
prior to its effective date." The First Circuit resolved the same
question in favor of Chase, the Supreme Court resolved the circuit split
and reversed the decision of the Ninth Circuit.
At the time of the relevant dispute, Section 226.6 of Regulation Z
required credit card issuers to provide debtors an "initial disclosure
statement" to include, among other things, "a disclosure of each periodic
rate that may be used to compute the finance charge." In addition,
Section 226.9(c) required that prior notice be given to the debtor
"[w]henever any term required to be disclosed under 226.6 is changed or
the minimum periodic payment is increased."
required credit card issuers to provide debtors an "initial disclosure
statement" to include, among other things, "a disclosure of each periodic
rate that may be used to compute the finance charge." In addition,
Section 226.9(c) required that prior notice be given to the debtor
"[w]henever any term required to be disclosed under 226.6 is changed or
the minimum periodic payment is increased."
Therefore, the question before the Supreme Court was "whether the Debtor's
interest rate constitutes a change to a 'term required to be disclosed
under §226.6,' requiring a subsequent disclosure under §226.9(c)(1)." The
Supreme Court held that an interest-rate increase does not "constitute a
'change in terms' under Regulation Z, when the change is made pursuant to
a provision in the cardholder agreement allowing the issuer to increase
the rate, up to a state maximum, in the event of the cardholder's
delinquency or default."
interest rate constitutes a change to a 'term required to be disclosed
under §226.6,' requiring a subsequent disclosure under §226.9(c)(1)." The
Supreme Court held that an interest-rate increase does not "constitute a
'change in terms' under Regulation Z, when the change is made pursuant to
a provision in the cardholder agreement allowing the issuer to increase
the rate, up to a state maximum, in the event of the cardholder's
delinquency or default."
Rejecting one among many of Debtor's arguments against deference to the
Board, the Court further reasoned that "there is no reason to believe that
the interpretation advanced by the Board is a 'post hoc rationalization'
taken as a litigation position." In addition, the Board's "2004 notice of
rulemaking and the 2007 proposed amendments to Regulation Z make clear
that, prior to 2009, the Board's fair and considered judgment was that 'no
change-in-terms notice is required if the creditor specifies in advance
that the circumstances under which an increase…will occur,' and 'immediate
application of penalty pricing upon the occurrence of events specified in
the contract' was permissible." Therefore, "it is clear that deference to
the interpretation in the Board's amicus brief is warranted."
Board, the Court further reasoned that "there is no reason to believe that
the interpretation advanced by the Board is a 'post hoc rationalization'
taken as a litigation position." In addition, the Board's "2004 notice of
rulemaking and the 2007 proposed amendments to Regulation Z make clear
that, prior to 2009, the Board's fair and considered judgment was that 'no
change-in-terms notice is required if the creditor specifies in advance
that the circumstances under which an increase…will occur,' and 'immediate
application of penalty pricing upon the occurrence of events specified in
the contract' was permissible." Therefore, "it is clear that deference to
the interpretation in the Board's amicus brief is warranted."
Eric Tsai
McGinnis Wutscher Beiramee LLP
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989
McGinnis Wutscher Beiramee LLP
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989
Fax: (866) 581-9302
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Email: etsai@mwbllp.com
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