One to Watch: Chase Bank USA, NA v. McCoy
The U.S. Supreme Court has granted certiorari in Chase Bank USA, NA v. McCoy, on appeal from the 9th Circuit opinion in which the Court 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 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.
Fed Issues Final Credit Card Rules
The Federal Reserve yesterday announced its final rule amending Regulation Z regarding late payment fees, interest rate changes, and other penalty fees. The final rule makes a number of significant amendments to Reg Z, including:
- Prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations.
- Prohibits credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.
- Bans "inactivity" fees, such as fees based on the consumer's failure to use the account to make new purchases.
- Prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
- Requires issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.
The Fed now publishes an online credit card guide for consumers and has issued a new publication with details on the credit card changes effective August 22.
9th Circuit Defines Limits to FCBA Duties
The Ninth Circuit last week defined the limitations on a credit card issuer's duties to communicate with authorized card users regarding billing disputes. In Edwards v. Wells Fargo & Co., defendant Wells Fargo issued credit cards to Hamid and Saeid Maghamfar, two brothers, who were obligors on the account. The Maghamfars later added a third person, plaintiff Paul Edwards, as an authorized user of the account, and Wells Fargo issued a card to Edwards. Edwards had numerous disputes with vendors related to transactions on the card. Wells Fargo initially communicated with Edwards about the disputes, apparently believing he was an attorney for the Maghamfars. When Wells Fargo discovered that Edwards was not an attorney, just an authorized user, it stopped communicating with him, or responding to him, regarding the disputes.
Edwards sued Wells Fargo in district court in Nevada, alleging violations of the Fair Credit Billing Act ("FCBA"), part of the Truth in Lending Act, and violations of the Nevada Unfair Consumer Practices Act. The district court granted summary judgment for Wells Fargo. Plaintiff appealed.
The Ninth Circuit affirmed. The Court concluded that a card issuer does not owe a duty to communicate with a non-obligor on the account. The Court's analysis was complicated by the tension between definitions in the FCBA and in Regulation Z, its implementing regulation. Under the FCBA, a card issuer's duties run only to an "obligor" on the account. Since plaintiff did not assert he was an obligor, defendant would owe him no duty.
However, under Regulation Z, the billing dispute process is triggered by communication from a "consumer." Regulation Z defines "consumer" as a “cardholder or natural person to whom consumer credit is offered or extended.” After detailed analysis, the Court concluded that plaintiff is not a "consumer" under Regulation Z. Because plaintiff was neither an "obligor" under the FCBA nor a "consumer" under Regulation Z, Wells Fargo had not duty to respond to his billing disputes.
Fed Proposes New Interest Rate and Fee Rule
The Federal Reserve yesterday announced that it has issued a new proposed rule amending Regulation Z to change regulations regarding late payments and penalty fees charged by credit card issuers and to require card issuers to reconsider increases in interest rates. The new rule comes on the heels of the recent effective date of Regulation Z amendments implementing the Credit CARD Act.
Among other things, the proposed rule announced yesterday would:
- Prohibit credit card issuers from charging penalty fees (including late payment fees and fees for exceeding the credit limit) that exceed the dollar amount associated with the consumer's violation of the account terms. For example, card issuers would no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
- Ban inactivity fees, such as fees based on the consumer's failure to use the account to make new purchases.
- Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
- Require credit card issuers to inform consumers of the reasons for increases in rates.
- Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.
The 30-day comment period for the proposed rule will begin when the proposed rule is published in the Federal Register.
Rules Implementing the Credit CARD Act Effective Today
Among other things, the final rules will:
- limit the application of increased rates to existing credit card balances.
- require credit card issuers to consider a consumer’s ability to make the required payments.
- establish special requirements for extensions of credit to consumers who are under the age of 21.
- limit the assessment of fees for exceeding the credit limit on a credit card account.
Last week, the Federal Reserve announced a Credit Card website to help consumers better understand the credit card rules that take effect today. Two interactive features on the site enable consumers to learn more about credit-card offers’ terms and fees and about the new features on monthly statements. The Fed has also posted a summary of the rule changes for consumers.
Fed Issues Final Credit Card Rule
The Federal Reserve has issued its final rules amending Regulation Z, which implements the Truth in Lending Act, pursuant to the Credit CARD Act of 2009. Previous legislative efforts to expedite the effective date of the CARD Act resulted in no changes.
Among other things, the final rule, effective February 22, 2010, will:
• limit the application of increased rates to existing credit card balances;
• require credit card issuers to consider a consumer’s ability to make the required payments;
• establish special requirements for extensions of credit to consumers who are under the age of 21; and
• limit the assessment of fees for exceeding the credit limit on a credit card account.
The Fed has posted a summary of the rule changes for consumers.
Fed Approves Mortgage Sale Disclosure Rule
On November 16, 2009, the Federal Reserve Board approved an interim final rule amending Regulation Z, 12 CFR 226, establishing a new requirement for notifying consumers of the sale or transfer of their mortgage loans. Specifically, the rule amends Section 131(g) of the Truth in Lending Act (TILA), to implement Section 404(a) of the 2009 Helping Families Save Their Homes Act, and requires a purchaser or assignee that acquires a mortgage loan to provide the required disclosures to the consumer in writing no later than 30 days after the date on which the loan is sold or otherwise transferred or assigned. The new disclosure requirements apply whether the acquisition occurs as a result of a purchase or other transfer or assignment, but a person is covered by the rule only if the person acquires legal title to the debt obligation.
Significantly, Section 404(a) and the interim final rule apply to persons that acquire mortgage loans without regard to whether they also extend consumer credit by originating mortgage loans. However, the interim final rule applies only to persons that acquire more than one mortgage loan in any 12-month period. The interim final rule is effective immediately, but compliance is optional for 60 days from the date of publication.
9th Circuit Revives Claim on TILA Rate Disclosures
The Ninth Circuit last week reversed and remanded the dismissal of a credit card rate increase disclosure case in Barrer v. Chase Bank USA, NA.
In Barrer, plaintiffs had a Chase credit card. In February 2005, plaintiffs received a Change in Terms Notice from Chase, amending the terms of the cardholder agreement, including significantly increasing the applicable interest rate. Plaintiffs continued to use the card and the applicable interest rate increased within two months. Plaintiffs filed a putative class action complaint alleging Chase violated the Truth in Lending Act, 15 U.S.C. §1601 et seq., and Regulation Z, 12 C.F.R. §226. Plaintiffs claimed that Chase failed to disclose that it would increase the APR on the account based on information obtained from their credit report. The district court granted Chase's motion to dismiss and entered judgment for Chase. Plaintiffs appealed.
On appeal, the Ninth Circuit reversed and remanded, holding that plaintiffs had stated a claim under TILA because Chase could not show as a matter of law that the cardholder agreement made clear and conspicuous disclosures of the APRs that Chase was permitted to use.
The Court held that, contrary to plaintiffs' claims, neither TILA nor Regulation Z require disclosure of a card issuer's plan to raise the APR based on information in a cardholder's credit report. However, the Court held that sections 226.6(a)(2) and 226.5(a)(1) of Regulation Z requires "clear and conspicuous" disclosure of any APR that "may be used to compute the finance charge." Although Chase's change of terms notice disclosed the APRs that Chase was permitted to use, the Court held that the disclosure was not "clear and conspicuous" as a matter of law.
Fed Issues Final New Credit Card Rules
The Federal Reserve yesterday issued a press release and highlights detailing its final rules revising regulation AA, revising regulation DD, and revising regulation Z. The new rules significantly alter the current regulations governing card issuers' payment billing cycles, allocation of payments, interest rate increases, security deposits and fees, credit card holds, and firm offers of credit. The new rules also make significant changes to overdraft protection linked to deposit accounts, including imposing an opt-out provision, eliminating overdraft charges resulting from debit holds, and changing required overdraft fee disclosures.
The revised regulation AA and regulation Z take effect on July 1, 2010. The revised regulation DD takes effect on January 1, 2010. Separately, the Fed seeks public comment on proposed amendments to Regulation E governing electronic funds transfers.
The Office of Thrift Supervision also announced and detailed the similar new rules for its regulated entities, as did the National Credit Union Administration.
Fed Seeks Public Comment on MDIA TILA Revisions
Last week, the Federal Reserve released its latest proposed revisions to Regulation Z, the Truth In Lending Act, to implement the July 2008 Mortgage Disclosure Improvement Act ("MDIA"), enacted as part of the Housing and Economic Recovery Act of 2008. The comment period for the proposed rule closes on January 23, 2009.
Among other things, the proposed rule implements the MDIA's requirements that lenders give good faith estimates within three business days of receiving an application for a mortgage and before collecting any fees, other than credit report fees. The MDIA broadens the Fed's July 2008 final rule by extending these requirements to homes other than a borrower's principal dwelling. The proposed rule also requires lenders to wait seven days to close a loan after providing the disclosures. The proposed rule also requires new disclosures of a revised annual percentage rate, and to wait three days before closing the loan if the APR changes in the interim beyond a minimum amount.
The proposed rule would become effective on July 30, 2009.
9th Circuit Confirms Limits to TILA Statutory Damages
The Ninth Circuit this week confirmed some limits to the recovery of statutory damages under the Truth in Lending Act ("TILA") and Regulation Z. In McDonald v. Checks-N-Advance, Inc. (In Re Ferrell), the Ninth Circuit held that a consumer may not recover statutory damages for violations of the credit disclosure requirements in 15 U.S.C. 1638(b)(1) or 15 U.S.C. 1632(a).
In McDonald, consumer Bobby Ferrell, Jr., borrowed $300 from Checks-N-Advance in 2002. Ferrell defaulted on the loan, and filed for Chapter 13 bankruptcy in 2003. Chapter 13 Trustee Kathleen McDonald, not the creditor, filed a proof of claim for the unpaid loan, then initiated an adversary proceeding to deny the claim. The Trustee's complaint alleged violations of TILA credit disclosures, including 15 U.S.C. 1638(b) and 15 U.S.C. 1632(a), as well as violations of Nevada state consumer loan law.
The creditor did not respond to the Trustee's complaint. The bankruptcy court entered a default judgment in favor of the Trustee and held that the creditor had violated 15 U.S.C. 1638(b)(1), 15 U.S.C. 1632(a), and Regulation Z. The bankruptcy court denied the Trustee any recovery of statutory damages, however, and denied actual damages as well as the Trustee's state law claim. The Trustee appealed to the bankruptcy appellate panel, which affirmed. The Trustee then appealed to the Ninth Circuit.
The Ninth Circuit affirmed, holding that a consumer may not recover statutory damages under 15 U.S.C. 1638(b)(1) or under 15 U.S.C. 1632(a) because the list of exceptions to statutory damages enumerated in 15 U.S.C. 1640(a) encompasses 15 U.S.C. 1638(b)(1) and its corresponding regulation 12 C.F.R. 226.17(b), as well as 15 U.S.C. 1632(a).
The Court also held that the Trustee had failed to show any actual damages in connection with the alleged TILA violations, because the Trustee failed to demonstrate detrimental reliance: that, absent the violations, the borrower "would either have secured a better interest rate elsewhere, or foregone the loan completely." Separately, the Court held that the Trustee's Nevada state law claim was properly denied because she failed to plead the applicable statute with specificity.
Comment Period Closes on Credit Card and Overdraft Rules
The comment period has closed for the Federal Reserve's sweeping proposed rule changes for credit cards and overdrafts. The proposed revisions to Regulation AA, revisions to Regulation DD, and revisions to Regulation Z seek to redefine "unfair or deceptive acts or practices" in connection with credit card accounts and overdraft protection services.
The Federal Reserve reports receiving an unprecedented number of comments on these proposed regulations. The Fed received nearly 50,000 comments on the proposed revisions to Regulation AA alone. On a parallel track, the "Credit Cardholders Bill of Rights Act of 2008" (H.R. 5244), which would amend Truth in Lending Act to include new restrictions on billing and practices related to credit cards, is moving to the floor of the House.
Fed Issues Final Version of New Mortgage Rule
The new rule, most provisions of which will be effective October 1, 2009, creates a new category of mortgage loans called "higher-priced loans" (determined by reference to an index published by the Fed) to target subprime mortgages. The rule also contains additional regulations applicable to all mortgages.
Specifically, for mortgages in the category of "higher-priced loans," the rule provides:
- lenders must assess a borrower's ability to repay the loan from income and assets other than the home's value, taking into account the highest scheduled payment in the first seven years of the loan;
- lenders must not rely on unverified income or assets to determine repayment ability;
- lenders must not impose prepayment penalties if the loan payment can change in the first four years of the loan, and prepayment penalties are limited to two years; and
- lenders must establish an escrow account for taxes and insurance for first-lien loans.
- lenders must credit a payment the date it is received, must provide a payoff statement within a reasonable time, and must not capitalize late fees;
- lenders and brokers must not coerce an appraiser to misrepresent the value of a home; and
- lenders must provide a good faith estimate of loan costs, including a schedule of payments, within 3 days of an application.
Fed's Credit Card and Overdraft Rules in Comment Period
The proposed changes would significantly alter the current regulations governing card issuers' payment billing cycles, allocation of payments, interest rate increases, security deposits and fees, credit card holds, and firm offers of credit. The revised rules would also make significant changes to overdraft protection linked to deposit accounts, including imposing an opt-out provision, eliminating overdraft charges resulting from debit holds, and changing required overdraft fee disclosures.
The American Bankers Association issued a public comment on the proposed rule changes on May 2, 2008, citing its concerns about a resulting "reduction in credit availability at the very time the Fed is working to increase access to credit in the marketplace."
