January 24, 2011

Supreme Court Decides Chase Bank USA, N.A. v. McCoy

On January 24, 2011, the Supreme Court decided Chase Bank USA, N.A. v. McCoy, No. 09-329, holding that an increase in a credit card interest rate, made pursuant to a previously disclosed term in a credit agreement, was not a change in terms that required advance notice to the cardholder under the pre-2009 version of Regulation Z.

Promulgated by the Federal Reserve Board, Regulation Z implements the terms of the Truth In Lending Act.  Before it was amended in August 2009, Regulation Z required credit card issuers to provide advance notice to cardholders of any change in the terms of their credit agreements. It also provided that "[n]o notice under this section is required when the change . . . results from . . . the consumer's default or delinquency (other than an increase in the periodic rate or other finance charge).  12 CFR § 226.9(c)(2).

Plaintiff James McCoy held a credit card issued by Chase Bank. The cardholder agreement provided that he was eligible for certain rates, so long as he met certain conditions, including making timely, minimum payments. It further stated that if McCoy violated those conditions, Chase could raise the rate up to a certain maximum limit. McCoy made a late payment, and Chase increased his interest rate under the agreement without giving advance notice of the increase.  McCoy sued, alleging that Chase's failure to provide advance notice violated Regulation Z. The district court dismissed McCoy's complaint on grounds that the increase did not change the terms of the credit agreement. The Ninth Circuit reversed, holding that Regulation Z requires issuers to provide advance notice of interest-rate increases triggered by a default.

The Supreme Court unanimously reversed the Ninth Circuit. The "key question," wrote the Court, " is "whether the increase actually changed a ‘term' of the Agreement that was required to be disclosed."  Regulation Z addressed this question by stating that advance notice is required for increases in a periodic rate caused by delinquency, but did not resolve it unambiguously because the regulation did not specifically address whether increases specified by the agreement's terms could be considered a change.  Under settled precedent, the Court looked to the Federal Reserve Board's own interpretation of its regulation to resolve the ambiguity.  In an amicus brief, the Board endorsed Chase's position that McCoy's increase did not change a term of the agreement, but "merely implemented one that had been initially disclosed," and hence did not require advance notice.  Because the Board's interpretation was not "plainly erroneous or inconsistent with the regulation," and was also not a post hoc rationalization taken as a litigation position, the Court considered itself bound to apply it.

Justice Sotomayor delivered the opinion for a unanimous Court.

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