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.
The Court analyzed the text of Regulation Z, specifically section 226.6(a)(2), which governs initial disclosure statements, and section 226.9(c)(1), which governs subsequent disclosures. Plaintiff argued that the interest rate change constituted a change in the "periodic rate" of his account, which would require subsequent disclosure under 226.9(c)(1). Chase argued that "the increase did not change a term in the agreement, but merely implemented one that had been initially disclosed" under 226.6(a)(2) and thus no subsequent disclosure was required. The Court concluded that Regulation Z is ambiguous on the question of whether the increase in plaintiff'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).
To resolve the issue, the Court turned to the Fed's interpretation of Regulation Z, which had been made more clear by the Fed's amicus brief in the case. The Court gave deference to the Fed's brief, and held Chase was not required to give notice of the interest rate increase under the version of Regulation Z applicable at the time. The Court rejected the suggestion that no deference was warranted because the policy on such disclosure had since changed. The Court noted that the change was itself an indication that the previous policy did not require disclosure. The Court also rejected plaintiff's argument that no deference was warranted because the Fed's position was unsupported by the Official Staff Commentary to Regulation Z. The Court held that the Official Staff Commentary did not cure the ambiguity at issue, so it was appropriate to look to the Fed's amicus brief for its analysis.
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