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).
Defense attorneys argued that Comment 1 of the Federal Reserve’s Official Staff Commentary controls, and that it specifically states that notice is not required of changes “initially disclosed,” such as “Rate increases under a properly disclosed variable-rate plan, a rate increase that occurs when an employee has been under a preferential rate agreement and terminates employment, or an increase that occurs when the consumer has been under an agreement to maintain a certain balance in a savings account in order to keep a particular rate and the account balance falls below the specified minimum.” McCoy, at 3330 (quoting 12 C.F.R. § 226.9(c), cmt. 1). The Circuit Court held, however, that Comment 3 governs: Comment 3 provides that “‘a notice of change in terms is required, but may be mailed or delivered as late as the effective date of the change . . . [i]f there is an increased periodic rate or any other finance charge attributable to the consumer’s delinquency or default.’” Id. (quoting § 226.9(c)(1), cmt. 3). Under the Court’s analysis, “The plain-meaning of Comment 3 is to require notice when a cardholder’s interest rates increase because of a default, but to specify that the notice may be contemporaneous, rather than fifteen days in advance of the change.” Id. Accordingly, the Circuit Court held that plaintiff’s class action complaint had stated a TILA claim under Comment 3. Id.
We do not discuss the Ninth Circuit’s analysis in further detail. We note, however, that Circuit Judge Cudahy filed a dissenting opinion, arguing that plaintiff had not stated a claim under TILA and, accordingly, that the district court order dismissing the TILA class action should have been affirmed. See McCoy, at 3343 et seq. We note further that the majority opinion acknowledges that its reading of the examples provided by the Federal Reserve in Comment 1 is “not the only conceivable one,” and, further, that it is “reading” into the Comment’s reference to “an increase that occurs” the requirement that the increase by “automatic.” Id., at 3332 n.1. The author finds the dissents interpretation of the Comment to be the more logical, and further finds the dissents interpretation to be consistent with subsequent statements by the Federal Reserve. The dissents view is also consistent with decisions reached by several district courts and in an unpublished opinion out of the Ninth Circuit. See id., at 3336.