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McCoy v. Chase Manhattan Bank, N.A.

2010-11 preview of the U.S. Supreme Court

559 F.3d 963 (9th Cir. 2009), cert. granted, 78 U.S.L.W. 3743 (June 21, 2010) (No. 09-329)

When a creditor increases the periodic rate on a credit card account in response to a cardholder default, pursuant to a default rate term that was disclosed in the contract governing the account, does regulation Z, 12 C.F.R. § 226.9(c), require the creditor to provide the cardholder with a change-in-terms notice, even though the contractual terms governing the account have not changed?

This case presents the issue of whether the Federal Reserve Board regulation promulgated to implement the Truth in Lending Act ("Regulation Z"), 12 C.F.R. §§ 226.1 – 226.58, requires credit card companies to notify consumers prior to raising interest rates due to a consumer default. This case arose before amendments to Regulation Z, which clearly require such notice, went into effect on Feb. 22, 2010. There is a circuit split on whether the law had previously required notice under these circumstances.

In 2006, James A. McCoy filed a class action lawsuit in federal court against Chase Manhattan Bank USA, alleging the bank had violated the Truth in Lending Act, 15 U.S.C. §§ 1601-1660j. McCoy alleged inter alia that Chase failed to notify members of the class before it closed their credit card accounts to new transactions and raised the interest rate on their balances based on a late payment on a debt owed either to Chase or to another creditor. Dismissing McCoy's complaint, the District Court held that Chase was not required to notify its card holders of a change in interest rate due to a consumer default so long as the possibility of such a rate increase and the maximum possible rate had previously been disclosed to the consumer. The court adopted the reasoning of a decision in a virtually identical class action filed by McCoy's counsel on behalf of another plaintiff.

McCoy appealed the court's dismissal of his complaint and a divided panel of the Ninth Circuit reversed. Carefully parsing the Federal Reserve Board's Official Staff Commentary to Regulation Z, the panel majority concluded that banks were required to disclose interest rate increases based on a consumer default at the latest by the day that the rate was increased. The majority determined that statements in an Advanced Notice of Proposed Rulemaking (ANPR) issued by the Federal Reserve Board were ambiguous and did not lend strong support to Chase's contrary position.

The McCoy panel's decision was contrary to that of a different panel of the Ninth Circuit. Evans v. Chase Bank USA, N.A., 267 Fed. App'x  692 (9th Cir. 2008). Moreover, both the First and Seventh Circuits also reached contrary results when confronted with the same issue. Shaner v. Chase Bank USA, N.A., 587 F.3d 488 (1st Cir. 2009); Swanson v. Bank of America, N.A., 559 F.3d 653, reh'g denied, 563 F.3d 634 (7th Cir. 2009). Further complicating matters, the First Circuit's decision in Shaner relied heavily on an amicus brief submitted by the Federal Reserve Board at the behest of the court that supported Chase's interpretation of the regulation. The Supreme Court granted certiorari to resolve this split.

There is no question that Regulation Z now prohibits the practice that McCoy is challenging. In early 2009, the Federal Reserve Board finalized an amendment to Regulation Z requiring credit card companies to notify consumers at least 45 days before an interest rate increase based on a consumer default. 74 Fed. Reg. 5244 (Jan. 29, 2009). This amendment was originally scheduled to go into effect on July 1, 2010, but the board changed the effective date to Feb. 22, 2010, in accordance with the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) of 2009, Pub. L. 111-24, 123 Stat. 1734 (2009). 75 Fed. Reg. 7658 (Feb. 22, 2010). The question is whether class members will have a remedy for such practices that took place prior to Feb. 22, 2010, the effective date of the amendment to Regulation Z.

Although the current interpretation of Regulation Z is not likely to be impacted by the court's decision, this case may nevertheless have future consequences because it provides the court an opportunity to opine regarding how lower courts should interpret the Truth in Lending Act and Regulation Z and weight to be given the Federal Reserve Board's official staff commentary. While the Supreme Court has already indicated that this commentary should receive weighty deference, see Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566 (1980), there is an open question concerning the amount of deference, if any,  where the board's commentary is arguably ambiguous.

The court may also take the opportunity to establish the level of deference owed to Federal Reserve Board documents other than the official staff commentary. As noted above, the McCoy court found the ANPR issued by the Federal Reserve Board was too ambiguous to support Chase's position but, if the court disagrees and finds the ANPR was not too ambiguous, it may rule that deference is owed. The court's ruling regarding the level of deference to give to an ANPR could have significant consequences for interpreting regulations in this context and across the spectrum of federal agencies.  

AARP supported the amended Regulation Z required by the CARD Act to improve the rights of consumers by curtailing unfair increases in interest rates, prohibiting exorbitant and unnecessary fees, reallocating payments so that higher rate balances are paid off first, eliminating double cycle billing, and banning universal default on existing balances.

Older individuals are relying more and more on credit cards to defray financial obligations that previously were paid by other means. As the recession continues, credit card usage among older people remains brisk. According to data compiled by AARP, within the 50-plus population, 76 percent have at least one credit card. And while more than half state they pay the total outstanding monthly balance each month, one-third carry a balance, paying more than the minimum, but less than the total.

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