Seventh Circuit Holds That Consumer Consent To Increased Rates Trumps Notice Regulation

Swanson v. Bank of America, 559 F.3d 653 (7th Cir. 2009), involved a class action suit where Bank of America extended credit to the plaintiffs under the condition that if the balance on the credit card exceeded the credit limit at the end of two months in any rolling 12-month period, the interest rate on the card would be increased from 18% to 32% per annum.

The terms of the agreement between Bank of America and the plaintiffs were later amended to provide that the higher interest rate would take effect at the beginning of the billing cycle to which it applied rather than being applied to the beginning of the next billing cycle. Plaintiffs received notice of the amended terms and agreed to the terms by their continued use of the credit cards.

The class representative, Laura Swanson, exceeded her credit limit for the months of November and December 2007. As a result, Bank of America raised her interest rate effective at the start of the November/December billing cycle. Swanson argued that this practice of retroactively applying the interest rate to the previous billing cycle violated 12 C.F.R. § 226.9(c), issued by the Federal Reserve under the Truth in Lending Act. Swanson conceded that her contract with Bank of America allowed it to increase the interest rate retroactively, but argued that the Federal Reserve regulation vitiated her consent to such a change.

Section 226.9(c) states that a notice of the change in terms must be mailed or delivered at least 15 days prior to the effective date of the change. However, the 15-day notice requirement does not apply if the customer has agreed to the change—the notice must simply precede the effective date of the change. Comment 1 to the regulation further specifies that "No notice of a change in terms need be given if the specific change is set forth initially."

The Seventh Circuit ultimately determined that Swanson's consent to the retroactive interest rate increase negated Bank of America's duty to provide the statutory notice. The court noted that both the regulation and the comments to the regulation were ambiguous as to whether the 15-day notice applied to rate increases due to a balance exceeding the credit limit. As a result, the ambiguous regulation and comment did not override the unambiguous terms of the contract. The court reasoned that the purpose of the advanced notice was to allow the consumer to shop for better credit card rates prior to the rate increase—not to avoid penalties for complete defaults such as late payments or over-limit charges.

The court also did not want to override the contract terms given the fact that the Federal Reserve has changed its regulations, effective July 1, 2010, to prevent retroactive rate changes and require a 45-day notice of higher interest rates that expressly overrides any contractual provisions to the contrary. According to the court, Swanson attempted to argue for the benefits of this new regulation prior to its effective date. However, the new regulation and its corresponding comments were a recognition by the Federal Reserve that such regulation is not currently in place. As a result, Bank of America's actions were proper under existing law.

Posted by: Michelle R. Maslowski

Categories: Credit Cards, Duties to Customers