9th Circuit: Rate Increase After Default Requires Notice
In McCoy v. Chase Manhattan Bank, USA, N.A., the Ninth Circuit held that a credit card issuer's retroactive rate increase after a default requires contemporaneous notice to the consumer under the Truth in Lending Act, 15 U.S.C. §§ 1601-1615 ("TILA") and Regulation Z, 12 C.F.R. §226.
In McCoy, plaintiff alleged that credit card issuer Chase Manhattan Bank, USA, increased the interest rate on his card retroactively, without notice to him, after he made a late payment. Plaintiff sued Chase, alleging that the rate increase violated TILA and Delaware law. The district court dismissed plaintiff's claims with prejudice, holding Chase was not required to give notice because its cardholder agreement discloses the highest rate that could apply in the case of default. Plaintiff appealed.
On appeal, the Ninth Circuit reversed in part, affirming only the dismissal of two of plaintiff's state law causes of action. On the notice issue, the Court analyzed the notice requirements in Regulation Z. Chase asserted that Section 226.6 requires notice only of a change in the contractual terms of its cardholder agreement. Plaintiff asserted that Section 226.6 also requires notice of the items specifically identified in Section 226.6(a)(2), including the a change in the interest rate. The Court agreed with plaintiff, relying on its interpretation of the Official Staff Commentary to Regulation Z by the Federal Reserve Board, and concluding that specific contemporaneous notice was required for a rate increase triggered by a consumer default.
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