TILA Class Action Defense Cases–McCoy v. Chase: Ninth Circuit Reverses Dismissal Of TILA Class Action Holding Lender Must Give Notice Of Interest Rate Increase Based On Late Payments To Other Creditor
District Court Erred in Dismissing TILA Class Action because Regulation Z Required Lender to Notify Credit Card Holder of Increase in Interest Rate Based on Late Payments to Other Creditor Ninth Circuit Holds
Plaintiff filed a class action against Chase Manhattan Bank alleging violations of the federal Truth in Lending Act (TILA); the class action complaint asserted that Chase violated TILA by “increase[ing] his interest rates retroactively to the beginning of his payment cycle after his account was closed to new transactions as a result of a late payment to Chase or another creditor,” but failing to give him notice of the increase until after it had already taken effect. McCoy v. Chase Manhattan Bank, USA, ___ F.3d ___ (9th Cir. March 16, 2009) [Slip Opn., at 3325, 3328]. Defense attorneys moved to dismiss the class action on the grounds that Chase was not required to give notice of the rate increase because it had disclosed in its Cardmember Agreement the highest rate that the Bank could apply in the event of a cardmember default. Id., at 3328. The district court agreed and dismissed the class action, id. Plaintiff appealed. The Ninth Circuit explained at page 3328, “This case presents the question of whether the notice requirements of [TILA] and Regulation Z…, as interpreted by the Federal Reserve Board’s Official Staff Commentary, apply to discretionary interest rate increases that occur because of consumer default. We hold that Regulation Z requires a creditor to provide contemporaneous notice of such rate increases.” The Circuit Court therefore affirmed in part and reversed in part.
The Ninth Circuit began its discussion by noting that “Congress enacted TILA to ‘assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.’” McCoy, at 3329 (quoting 15 U.S.C. § 1601(a)). Toward that end, the Federal Reserve Board adopted Regulation Z, which addresses when and how notice of changes in terms must be given and which provides, in part, that written notice is required “[w]henever any term required to be disclosed under § 226.6 is changed or the required minimum periodic payment is increased,” 12 C.F.R. § 226.9(c)(1). Section 226.6, in turn, requires that creditors to disclose “each periodic rate that may be used to compute the finance charge.” 12 C.F.R. § 226.9(a)(2). The Circuit Court explained that the parties “dispute the meaning of the phrase ‘any term required to be disclosed under § 226.6’”; defense attorneys argued that “the phrase applies only to the contractual terms of Chase’s Cardmember Agreement,” while plaintiff argued that “the phrase also applies to the list of specific ‘items’ § 226.6(a)(2) requires be disclosed, which includes the interest rate that may be used.” McCoy, at 3329. The Ninth Circuit found the language of Regulation Z to be “ambiguous,” and noted that it would defer to the Federal Reserve’s “interpretation of its own ambiguous regulation” so long as that interpretation is not “‘plainly erroneous or inconsistent with the regulation.’” Id., at 3330 (citation omitted).