By Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, CCH Bank Compliance Guide, Bank Digest; co-author, Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis, Jan. 24, 2011.
The U.S. Supreme Court has reversed a consumer-friendly decision that a credit card lender violated Reg. Z—Truth in Lending (12 CFR 226) by increasing a delinquent consumer’s interest rate without giving the consumer a contemporaneous notice. Relying on a friend-of-the-court brief filed by the Federal Reserve Board rather than on its own interpretation of Reg. Z, the Court determined that the notice was not needed when the credit card agreement allowed the credit card company to impose an increase after the consumer violated the agreement's terms. However, the decision will have limited effect as it applies to the notice obligations under a version of Reg. Z that no longer is in effect. Under Reg. Z amendments that took effect in 2010, consumers are entitled to 45 days prior notice of rate increases due to defaults.
According to the Supreme Court’s opinion, the credit card agreement made the consumer eligible for "preferred" interest rates as long as he complied with requirements that included making timely payments on the credit card and all other credit accounts. If he became delinquent, the agreement said that the credit card lender could increase the interest rate on the account up to a maximum that was set out in the agreement; moreover, the increase could be applied to any balance that existed at the end of the billing cycle when the delinquency was noted, which had the effect of applying the increase retroactively. The consumer brought a class action claiming that the credit card company was required to give notice at the same time it increased the interest rate, so the rate could not be applied retroactively.
The U.S. Court of Appeals for the Ninth Circuit sided with the consumer. According to the appellate court, Reg. Z was ambiguous as to whether the consumer was entitled to notice that was contemporaneous with the rate increase. This led the appellate court to rely on the official staff commentary to the regulation, which the court said did require contemporaneous notice (McCoy v. Chase Manhattan Bank).
The credit card lender asked the Supreme Court to review this decision. Due to a contrary decision reached by the U.S. Court of Appeals for the First Circuit (Shaner v. Chase Bank), the Court accepted the case for review.
The Supreme Court described the issue as being whether the interest rate increase constituted a “change in terms” of the agreement under Reg. Z. The consumer argued that increasing the interest rate changed a term in the credit card agreement, while the credit card company asserted that the change merely implemented a term of the agreement allowing the increase. Each of these positions was a reasonable interpretation of the regulation, the Court said, which showed that Reg. Z was ambiguous. However, unlike the Ninth Circuit, the Supreme Court determined that the Reg. Z official staff comments did nothing to resolve that ambiguity. The staff commentary “largely replicates the ambiguity present in the regulatory text,” the Court said, and thus was no help to the consumer.
Under those circumstances, the Court’s next step was to look at how Reg. Z was interpreted by the agency responsible for adopting it—the Federal Reserve Board. The Fed had filed a brief with the Court stating that, in the Fed’s opinion, the version of Reg. Z in effect at the time permitted a retroactive rate increase if the possibility was part of the account agreement. The interpretation was entitled to deference since it was not “plainly erroneous or inconsistent with” the agency’s own regulation, the Court said.