US Sup Ct Upholds Former Reg Z Rule on Credit Card Rate Increase Disclosures Following Default

The Supreme Court of the United States recently held that, under the version of Regulation Z applicable at the time of the relevant transactions, TILA did not require a credit card issuer to provide the credit card holder with a change-in-terms notice before implementing a provision in the cardholder agreement allowing the bank to raise the card holder’s interest rate, up to a pre-set maximum, following the card holder’s delinquency or default.


A copy of the opinion can be found at:

http://www.supremecourt.gov/opinions/10pdf/09-329.pdf

As you may recall, in January 2009, the Board promulgated a final rule, scheduled to be effective July 1, 2010, which among other things included a new provision, §226.9(g), which requires 45 days’ advance notice of increases in rates due to cardholder delinquency or default, or as a penalty, including penalties for “events specified in the account agreement, such as making a late payment . . . .”12 CFR §226.9(g)(1)(2010). In May 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act). The Credit CARD Act amended TILA, in relevant part, to require 45 days’
advance notice of most increases in credit card annual percentage rates.

15 U. S. C. §1637(i). Because the Credit CARD Act’s notice requirements with respect to interest-rate increases largely mirrored the requirements in the new version of the new regulation, the Board changed the effective date of those requirements to August 20, 2009, to coincide with the statutory schedule. The transactions giving rise to the dispute at issue in this case arose prior to enactment of the Credit CARD Act and the promulgation of the new regulatory provisions.

The Supreme Court held that the Regulation Z rules were not clear on whether a change to an interest rate that resulted from a previously disclosed provision in a contract would require disclosure. The U.S.
Supreme Court deferred to the Federal Reserve, which in its amicus brief argued that the bank was not required to give the borrower notice under the version of Regulation Z that was in effect at the time.

Plaintiff (“Debtor”) was the holder of a card issued by creditor Chase Bank (“Chase”). The cardholder agreement between the parties provided, in relevant part, that Debtor was eligible for “preferred rates,” but that to keep those rates Debtor had to meet certain conditions. If any conditions in the credit agreement were not met, Chase reserved the right to “change Debtor’s interest rate and impose a non-preferred rate up to the maximum non-preferred rate described in the pricing schedule” and to apply any changes “to existing as well as new balances … effective with the billing cycle ending on the review date.” Debtor brought suit against Chase, alleging that Chase violated Regulation Z because Chase increased Debtor’s interest rate “due to his delinquency or default” and did not notify Debtor of the increase until after it had taken effect.

The district court dismissed Debtor’s complaint, “holding that because the increase did not constitute a ‘change in terms’ as contemplated by §226.9(c), Chase was not required to notify him of the increase before implementing it.” The Ninth Circuit reversed, holding that “because the credit agreement does not alert Debtor to the ‘specific change’ that will occur if he defaults, Chase was obliged to give notice of that change prior to its effective date.” The First Circuit resolved the same question in favor of Chase, the Supreme Court resolved the circuit split and reversed the decision of the Ninth Circuit.

At the time of the relevant dispute, Section 226.6 of Regulation Z required credit card issuers to provide debtors an “initial disclosure statement” to include, among other things, “a disclosure of each periodic rate that may be used to compute the finance charge.” In addition, Section 226.9(c) required that prior notice be given to the debtor “[w]henever any term required to be disclosed under 226.6 is changed or the minimum periodic payment is increased.”

Therefore, the question before the Supreme Court was “whether the Debtor’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).” The Supreme Court held that an interest-rate increase does not “constitute a ‘change in terms’ under Regulation Z, when the change is made pursuant to a provision in the cardholder agreement allowing the issuer to increase the rate, up to a state maximum, in the event of the cardholder's delinquency or default.”

Rejecting one among many of Debtor’s arguments against deference to the Board, the Court further reasoned that “there is no reason to believe that the interpretation advanced by the Board is a ‘post hoc rationalization’ taken as a litigation position.” In addition, the Board’s “2004 notice of rulemaking and the 2007 proposed amendments to Regulation Z make clear that, prior to 2009, the Board’s fair and considered judgment was that ‘no change-in-terms notice is required if the creditor specifies in advance that the circumstances under which an increase…will occur,’ and ‘immediate application of penalty pricing upon the occurrence of events specified in the contract’ was permissible.” Therefore, “it is clear that deference to the interpretation in the Board’s amicus brief is warranted.”