Oral argument: Dec. 8, 2010
Appealed from: United States Court of Appeals for the Ninth Circuit (Mar. 16, 2009)
COMMERCIAL LAW, TRUTH IN LENDING ACT, CREDIT CARDS
James McCoy alleges that Chase Bank (“Chase”) retroactively increased his credit card interest rate, without notice, in violation of the Truth in Lending Act’s Regulation Z. The Regulation has since been revised to require notice in this particular situation. McCoy argues that the plain language of Regulation Z mandated that he receive notice prior to an increase of his interest rate. Chase argues that the bank provided adequate notice. In support of its argument, Chase cites unofficial commentary promulgated by Federal Reserve Board, the agency which implements the Truth in Lending Act. The Supreme Court’s ruling will clarify the level of notice required prior to raising interest rates, and will provide advice on what sources may be used in interpreting complex statutes.
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?
Under the pre-2009 version of Banking Regulation Z, are creditors required to give notice prior to implementing the right to increase interest rates upon cardholder default if that right was part of the initial disclosure of terms?
Respondent James McCoy filed suit in California federal court, alleging that Petitioner Chase Bank USA, N.A. (“Chase”) violated the Truth in Lending Act. See McCoy v. Chase Manhattan Bank, USA, N.A., 559 F.3d 963, 964 (9th Cir. 2009). The purpose of the Truth in Lending Act is to provide consumers with clearer information regarding their credit. See 15 U.S.C. § 1601(a). The current case involves the Truth in Lending Act’s “Regulation Z” before it was amended in 2009. See McCoy, 559 F.3d at 968 n.2. Regulation Z explains what notice, if any, is required before changing credit terms under the Truth in Lending Act. See id. at 964.
Chase is a national bank association incorporated in Delaware. See McCoy v. Chase Manhattan Bank USA, 2006 U.S. Dist. LEXIS 97257 at *2 (C.D. Cal. Aug. 10, 2006). McCoy sued on behalf of other Chase credit card holders, first alleging that Chase increased their interest rates without proper notice. See id. McCoy argued that this rate increase violates the Truth and Lending Act. See id. In his Second Amended Complaint, McCoy conceded that that the Cardmember Agreement (“Agreement”) authorizes Chase to raise a card holder’s interest rates if that cardholder is delinquent. See id. at *3. The District Court held that the Agreement as well as state and federal law authorized interest rate increases upon “delinquency” in either a Chase account or any other account with a creditor. See id. McCoy argues the problem lies with Chase’s failure to provide notice that a default with another creditor would trigger an increase in interest rates on the Chase account. See id. Chase contends that it addressed this possibility in the Agreement. See id.
McCoy’s second argument was that the interest rates are unlawful. See McCoy, 2006 U.S. Dist. LEXIS 97257at *4. He called them “dramatic and overreaching," "illegal penalties," and "punitive." See id. Chase argued that for dismissal of McCoy’s second argument because he failed to allege that the rates violated the Agreement or applicable state or federal law. See id. Ultimately, the United States District Court for the Central District of California dismissed McCoy’s complaint with prejudice. See id. at 14.
McCoy appealed to United States Court of Appeals for the Ninth Circuit. See McCoy, 559 F.3d at 963. He again argued that that Chase retroactively increased his interest rates because he made a late payment. See id. at 964. McCoy then alleged that he was only given notice of the rate increase after Chase had already raised the rate, which violates the Truth in Lending Act. See id. Chase argued, however, that the Truth in Lending Act does not mandate such notice. See id. at 965.
The United States Court of Appeals for the Ninth Circuit ruled in favor of McCoy, holding that Chase provided inadequate notice prior to increasing McCoy’s interest rate. See McCoy, 559 F.3d at 965. After finding Regulation Z ambiguous, the Ninth Circuit explained that the Federal Reserve Board’s Official Comment 3, by its plain language, required Chase to provide additional notice. See id. The dissent argued that the Federal Reserve had recently proposed amendments to Regulation Z requiring the notice at issue here, indicating that the Federal Reserve previously thought that the notice was not mandatory. See id. at 975. Chase appealed this ruling, and the Supreme Court of the United States granted certiorari on June 21, 2010. See Question Presented.
James McCoy argues that, under the Truth in Lending Act, he should have received notice of an increased interest rate prior to its date of effectiveness. He argues that failure to provide adequate notice could allow creditors to arbitrarily change consumer interest rates. Chase Bank argues that it provided proper notice to McCoy. Chase contends that banks should be allowed to follow all agency guidance, not just official commentary, in interpreting complex statutes, since this is established industry practice. Chase also argues that in a dispute over the meaning of a complex statute, the agency which promulgated the statute, not the court system, should ultimately decide its meaning.
The Purpose of the Truth in Lending Act
McCoy argues that following Chase’s position would ruin the public policy aims of the Truth in Lending Act. See Brief for Respondent, James A. McCoy at 19. McCoy notes that one of the main goals of the Truth in Lending Act is to provide clear and specific information on Annual Percentage Rates so that consumers can choose a credit card that best suits their needs. See id. McCoy fears that a creditor could set a base interest rate, but then change this to another rate, unbeknownst to the consumer. See id. at 20. This would hamper the ability of a consumer to make a fully informed choice when looking for credit, defeating the purpose of the Truth in Lending Act. See id.
Giving Deference to an Agency’s Interpretation
McCoy also argues that, as a matter of public policy, only official staff commentary should be used in statutory interpretation. See Brief for Respondent at 30. He reasons that this is because only official staff commentary is subject to public scrutiny through the notice and comment process. See id. McCoy concludes that both the plain meaning of the Truth in Lending Act, as well as its official staff commentary, support the view that Chase needed to provide notice before increasing his interest rate. See id. at 23.
The United States counters that public agencies, not the courts, should interpret complex regulations. See Brief of Amicus Curiae the United States of America in Support of Petitioner at 23. The United States argues that administrative agencies, such as the Federal Reserve Board, have the requisite expertise to interpret complex rules and regulations, which is often expressed outside of the agency’s official staff commentary. See id. The United States also notes that the Supreme Court previously held that an agency’s interpretation of its own regulations is to be closely followed unless such interpretation is ”irrational.” See id. Additionally, the United States argues that Congress intended the Federal Reserve Board to interpret the Truth in Lending Act in order to produce uniform standards. See id.
Reliance on Agency Interpretations
The American Bankers Association (“ABA”) argues that the Ninth Circuit’s ruling will prevent financial institutions like Chase from relying upon Federal Reserve guidance. See Brief of Amicus Curiae American Bankers Association (“ABA”) in Support of Petitioner at 15. The ABA asserts that allowing banks to follow Federal Reserve Board guidance is critical, since the Truth in Lending Act is a highly technical and complex statute. See id. The ABA contends that other sources of guidance, besides the statute’s official commentary, are often utilized in the banking industry. See id. at 16. The ABA believes this custom should continue. See id. They note that even banking regulators acknowledge the value of guidance found outside of official commentary. See id.
The Supreme Court’s decision will shed light on the degree of notice required before creditors can increase interest rates. If the Court finds in favor of McCoy, it could encourage banks to be more careful about providing sufficient notice before raising interest rates. If the Court finds for Chase, banks will have to contend with more lenient notice requirements.
This case turns on the interpretation of the pre-2009 notice requirements set forth in Regulation Z of the Truth in Lending Act (“TILA”). The arguments in this case revolve around the interpretation of the 2004 version of Regulation Z that requires credit card issuers to disclose the scope and circumstances triggering different financing terms. See 12 C.F.R. § 226. Regulation Z also requires that card issuers disclose the timing of the notification of a change in terms. See id. Each party argues that the Court must look to Federal Reserve Board statements on Regulation Z; the disagreement is over which Federal Reserve Board source provides the proper guidance.
Unambiguous Amicus Briefs and Plain Statutory Language
Chase Bank (“Chase”) argues that the Federal Reserve Board (“the Board”) unambiguously stated that Regulation Z does not require advanced or contemporaneous notice of a change in terms when the possibility of such a change is addressed in the cardholder agreement. See Brief for Petitioner, Chase Bank USA, N.A., at 21. Chase argues that the Board consistently holds that notice is not required when the initial cardholder agreement discloses the circumstances triggering an increase in interest rates . See id.
In Shaner v. Chase Bank USA, N.A., a similar case from the First Circuit Court of Appeals, the Board submitted an amicus brief stating that Regulation Z did not require a change-in-terms notice. See 587 F.3d 488, 492 (1st Cir. 2009). Chase cites this brief and asserts that under the pre-2009 Regulation Z, no-notice interest rate increases after default are merely implementations of disclosed terms and a “change in terms.” See Brief for Petitioner at 20. Chase also cites the amicus brief submitted by the United States of America to support its position. See id.; Brief of Amicus Curiae the United States of America in Support of Petitioner at 10. Chase and the United States agree that rate increases within the range outlined in initial credit agreement are proper; Chase argues it is merely implementing the terms of the contract. See Brief for Petitioner at 22; Brief of United States at 15–16.
In contrast, McCoy argues that Regulation Z’s plain language states that a creditor must give notice when increasing interest rates after a default. See Brief for Respondent, James A. McCoy at 13. Under 12 C.F.R. 226.9(c)(1), McCoy points out that creditors must provide written notice “[w]henever any term required to be disclosed under Section 226 is changed.” See id. McCoy claims that Chase conflates contract “terms” and credit “terms” when considering “change in terms” notice provisions in Regulation Z. See id. at 15–16. By focusing on the ambiguity of the word “terms,” McCoy contends that Chase changes the most important substantive credit term—the annual interest rate—while leaving the contract language unchanged. See id. at 16–18.
Further, McCoy claims that Chase’s interpretation leads to the undesirable result of subjecting consumers to a 300% increase in interest rates without prior notice. See Brief for Respondent at 20. Thus, McCoy argues that embedding the unlimited right to increase rates in a cardholder agreement does not qualify as a specific disclosure of credit terms. See id. at 21–22. McCoy posits that Chase’s position on Regulation Z would eviscerate the policy and purpose of TILA to protect consumers from deceptive, misleading, and predatory credit practices. See id. He reasons that consumers cannot compare unspecified discretionary credit terms to specific interest rates offered by other creditors. See id.
Deference to Amicus Briefs and Agency Counsel
Chase argues that based on the Court’s prior cases, an agency’s interpretation of its own regulations is controlling unless the interpretation is plainly inconsistent or clearly erroneous. See Brief for Petitioner at 25. Given the highly complex nature of TILA and banking regulations generally, Chase posits that deference to the Board’s interpretations in the amicus briefs is appropriate. See id. at 26. In addition, Chase notes that amicus briefs here and in Shaner were filed in response to an invitation from the Court, and that courts have almost categorically deferred to agency briefs in similar litigation. See id. at 29.
In contrast, McCoy contends that amicus briefs do not warrant deference because they contradict the plain language of Regulation Z. See Brief for Respondent at 35. McCoy claims that Chase’s reliance on amicus briefs for regulatory interpretation is inconsistent with the Federal Reserve Board’s explicit policy to offer “official staff interpretations.” See id. Further, McCoy notes that the “ad hoc interpretations” found in the amicus briefs undermine TILA’s “preference for resolving interpretative issues by uniform administrative decision, rather than through piecemeal litigation.” See id. at 37. Thus, McCoy argues that to defer to amicus briefs would allow the agency counsel to create new, contradictory regulations that undermine the reasoned judgment of the Board. See id. at 39.
Official Staff Commentary
Chase argues that the Ninth Circuit’s opinion misunderstands the Federal Reserve Board’s official regulatory interpretation of Section 226 in Comment 9(c)(1)-3. See Brief for Petitioner at 22–23. Chase contends that Comment 9(c)(1)-3 merely states a timing requirement for circumstances that already require notice. See id. Chase argues that Comment 9(c)(1)-3’s timing requirement applies when a creditor changes the actual terms of the cardholder agreement in response to a default and the contract does not specify any default rate. See id. Further, Chase claims that the Board’s official interpretation of Section 226(c) is located in Comment 9(c)-1, not Comment 9(c)(1)-3. See id. at 23–24. Last, Chase claims that the Board’s interpretation in its amicus brief must be correct because their interpretation actually inspired the proposed 2009 amendments to Regulation Z. See id. at 25.
In response, McCoy contends that Chase’s argument takes Board comments out of context and selectively applies the official staff commentary. See Brief for Respondent at 30–31. McCoy argues that a no-notice penalty interest rate increase occurs under a reservation of rights in Chase’s cardholder contract, and Comment 9(c)-1 never distinguishes between implementing a discretionary contract provision and a “change in terms.” See id. at 24, 30-31. McCoy contends that the cardholder agreement only discloses that Chase retains discretion to increase interest rates without specifically listing the triggering event and corresponding specific rate increase. See id. at 26. McCoy asserts that the notice exception in Comment 9(c)-1 cited by Chase is inapplicable because the cardholder agreement only states that Chase has the right to impose limitless rate increases at their discretion. See id. at 26–27. McCoy reasons that implementing an unlimited contract term requires notice to the consumer because it is a substantive change to the cardholder agreement. See id.
Further, McCoy posits that Comment 9(c)-1’s exception under Chase’s interpretation does not comport with the goal of TILA. See Brief for Respondent at 27. The Act aims to provide consumers with meaningful points of comparison between creditor’s terms. See id. at 26–27. McCoy concludes that because Chase’s initial disclosure did not specify the rate increase, pre-amendment Regulation Z mandates a contemporaneous notice of change in substantive terms. See id. at 32–33.
This case turns on the interpretation of the pre-2009 version of Regulation Z's notice requirement. Chase contends that Regulation Z only requires notice for a change of terms to the underlying contract, and that the imposition of penalty increases in interest rates amounts to the implementation of the cardholder agreement. McCoy argues that Chase’s cardholder agreement merely disclosed the reservation of the right to impose limitless rate increases without specifying how or when those increases would be imposed. The Supreme Court must address which statements of regulatory interpretation govern when evaluating Federal Reserve Board banking regulations. The Court’s decision will impact credit card holders subject to increases in their interest rates.
Edited by: Kate Hajjar
· Wex: Consumer Credit
· Office of the Comptroller of the Currency: Truth in Lending Act – Comptroller’s Handbook
· Banking Law Prof Blog, Ann Graham: Can a Credit Card Issuer Increase a Customer’s Rate without a Change-in-Terms Notice? (Nov. 22, 2011)