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Dreher Tomkies LLP
Attorneys at Law
2750 Huntington Center
41 South High Street
Columbus, Ohio 43215
Telephone: 614-628-8000
Fax: 614-628-1600

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The United States Supreme Court in a unanimous opinion recently held that, at the time of the transactions at issue in the case, Regulation Z did not require the creditor to provide the credit cardholder with a change-in-terms notice before the creditor implemented the cardholder agreement term that allowed it to raise the cardholder’s interest rate following delinquency or default. Chase Bank USA v. McCoy, 2011 WL 197641 (U.S. Jan. 24, 2011).

In MCCoy, the plaintiff was a holder of a credit card issued by Chase. The cardholder agreement governing the relationship provided that the plaintiff was eligible for “Preferred Rates,” but that the failure to meet certain conditions, including making at least the required minimum payments when due, could result in Chase changing the interest rate up to a maximum “Non-Preferred Rate” described in the “Pricing Schedule” and applying that rate to new and existing balances. Chase increased the plaintiff’s rate because of delinquency or default and applied the increase retroactively, but did not notify the plaintiff of the increase until after it had taken effect.

The plaintiff brought a class action in state court in California alleging violations of federal and state law. Chase removed the action to federal district court in California. In considering the plaintiff’s claim that Chase violated Regulation Z by not providing advance notice of the rate increase, the district court determined that because the increase was not a “change in terms” under Section 226.9(c) of Regulation Z, Chase was not required to give notice of the increase before implementing it.

A divided panel of the Court of Appeals for the Ninth Circuit reversed, holding that because the cardholder agreement did not alert the plaintiff of the specific change that would occur upon his default, Chase was required to give advance notice of the change. After the Ninth Circuit’s decision, the United States Court of Appeals for the First Circuit ruled in Chase’s favor on the same question. The United States Supreme Court granted certiorari to resolve the issue. The plaintiff’s state law claims were not before the Court.

On appeal, the Court framed the issue as whether an interest-rate increase constitutes 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 stated maximum, in the event of the cardholder’s delinquency or default. Thus, the Court noted, it must determine the meaning of a regulation promulgated by the Federal Reserve Board under its statutory authority. In discussing Regulation Z, the Court made clear that the transaction in question arose before enactment of the CARD Act and new Regulation Z, and that the Court would apply the pre-2009 provisions of Regulation Z to the case.

In examining Regulation Z, the Court found the regulation to be ambiguous on the question presented and determined that it would look to the FRB’s interpretation of the regulation for guidance. The FRB had submitted an amicus brief to the Court in which the FRB stated its view that Chase was not required to give the notice at issue. As the FRB’s brief stated, when a cardholder agreement identifies a contingency that triggers a rate increase, and the maximum possible rate that the issuer may charge if that contingency occurs, then no change-in-terms notice is required.

In adopting this interpretation, the Court dismissed the notion that the FRB’s interpretation was unworthy of deference because it came in a legal brief. There was no reason, the Court stated, to suspect that the FRB’s position as set forth in its amicus brief reflected anything other than the agency’s fair and considered judgment as to what the regulation required at the time the dispute arose. The Court also rejected the argument that the CARD Act’s and post-2009 Regulation Z’s requirement to give advance notice warranted a lack of deference to the FRB’s understanding of pre-2009 Regulation Z. Finally, it rejected the need to limit its deference only to the FRB’s Official Staff Commentary, which the Court found also to be ambiguous and, therefore, providing nothing to which to defer.

  • Mike Tomkies and Margaret Stolar