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.
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.
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.
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.
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.
