Supreme Court To Rule On Credit Card Agreements

The United States Supreme Court agreed to hear an appeal from the Ninth Circuit’s decision in McCoy v. Chase Manhattan Bank, USA, 559 F.3d 963 (2009). In the case below, the Ninth Circuit ruled that the Federal Reserve Board’s Regulation Z (enacted to enforce the Truth In Lending Act, “TILA”) required a credit card issuer to provide contemporaneous notice of the decision to increase a borrower’s interest rate.

It is common for the credit card issuer to include in the card agreement a clause that permits the issuer to increase the cardholder’s interest rate if the cardholder defaults (i.e. misses a payment). In this case, as often happens, the rate increase is retroactive to the cardholder’s prior statement date. Typically the rate increase is at the issuer’s discretion and occurs the cardholder first receives notice that fees have been imposed and the interest rate increased when the next billing statement includes those charges. The Ninth Circuit said that at this practice violates Regulation Z and that a “subsequent disclosure” to cardholders is required even if the issuer’s option to act was previously disclosed to the cardholder.

The Ninth Circuit decision was made by a divided panel. The majority held that Regulation Z is ambiguous and that the cardholder’s reading of Regulation Z was more natural and better implemented the TILA goal of providing “meaningful disclosure” of credit terms.

The dissenting judge cited six previous cases that he said raised the same issues and that all of them held against the cardholder.

We will follow the progress of this case in future blog posts.

Posted by: Vincent E. Mauer

Categories: Bankruptcy & Banking Law