Reg Z Does Not Require Disclosure on Default
The U.S. Supreme Court yesterday issued its opinion in Chase Bank USA, NA v. McCoy, reversing the 9th Circuit decision below, and holding a credit card issuer's retroactive rate increase after a delinquency or default does not require contemporaneous notice to the consumer under the Truth in Lending Act, 15 U.S.C. §§ 1601-1615 and Regulation Z, 12 C.F.R. §226.
In McCoy, plaintiff alleged that the credit card issuer 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.
The Ninth Circuit reversed in part, affirming only the dismissal of two of plaintiff's state law causes of action. On the disclosure issue, the Court analyzed the notice requirements in Regulation Z and held that specific contemporaneous notice was required for a rate increase triggered by a consumer default or delinquency. After the Ninth Circuit's opinion in this case, the First Circuit decided the same question in Chase's favor in Shaner v. Chase Bank USA, N.A. The Supreme Court granted certiorari to resolve the conflict between the circuits.
FDIC Finalizes Rule on IOLTA Accounts
The Federal Deposit Insurance Company (FDIC) approved a final rule including Interest on Lawyer Trust Accounts (IOLTAs) in the temporary unlimited deposit coverage added by an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FDIC's final rule provides that funds held in IOLTA accounts are fully insured without limit from December 31, 2010, through December 31, 2012, in addition to coverage provided by the institution for other accounts.
Proposed Fed Rules Expand TILA Disclosure Threshold
The Federal Reserve has issued proposed amendments to Regulation Z implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.
Among other things, the proposed rules amending Regulation Z, Truth in Lending, expands TILA's credit disclosure requirements to credit transactions up to $50,000 (up from $25,000) and prohibits creditors from engaging in certain practices with respect to those loans. Private education loans and mortgages are subject to TILA regardless of the transaction amount. The comment period on the proposed rule expires February 1.
Red Flag Rules Clarified
The Red Flag Program Clarification Act of 2010, passed in December, amends the Fair Credit Reporting Act with respect to the "Identity Theft Red Flags Rule," to define creditor to mean one that regularly and in the ordinary course of business:
"(1) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction;
(2) furnishes information to certain consumer reporting agencies in connection with a credit transaction; or
(3) advances funds to or on behalf of a person, based on the person's obligation to repay the funds or on repayment from specific property pledged by or on the person's behalf. Includes in the definition any other type of creditor as the federal agency (banking agency, National Credit Union Administration, or the Federal Trade Commission [FTC]) having authority over that creditor may determine appropriate, if the creditor offers or maintains accounts subject to a reasonably foreseeable risk of identity theft. Excludes from the definition of creditor, however, any creditor that advances funds on behalf of a person for expenses incidental to a service the creditor provides to that person."
Prior to this clarification, the definition of creditor was arguably broad enough to professional offices like doctors, accountants, and lawyers, which are now exempted.
Comment Period Closes on Fed's CARD Act Clarifications
The public comment period ended on Monday for proposed rules issued by the Federal Reserve to clarify certain regulatory provisions of the Credit CARD Act of 2009. The proposed rule includes several clarifying proposals:
- Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period. For example, a card issuer that offers to waive interest charges for six months would be prohibited from revoking the waiver and charging interest during the six-month period unless the account becomes more than 60 days delinquent.
- Application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened. Because the total amount of these fees cannot exceed 25 percent of the account's initial credit limit, a card issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally would not be permitted to charge more than $25 in additional fees during the first year after account opening.
- When evaluating a consumer's ability to make the required payments before opening a new credit card account or increasing the credit limit on an existing account, card issuers must consider information regarding the consumer's independent income, rather than his or her household income.
This final provision, the "independent income" rule, has drawn criticism for potentially restricting consumer credit for non-working spouses regardless of household income.
