On December 8 the U.S. Supreme Court heard oral arguments in Chase Bank USA v. McCoy, and on January 24 the Court ruled in favor of Chase in a case that could have set a precedent for the notice credit card companies must give consumers about interest rate increases.
An important issue in the case was whether credit card companies have to provide cardholders with a notice of an interest rate increase for payment default if the risk of an increase was spelled out in the credit card agreement. The Court ruled Chase did not have to provide written notice before increasing interest rates for account holders who defaulted on their credit card payment.
Rule Regulation Z
The class action lawsuit was filed in 2004, five years before the passage of the CARD Act. In 2010 the CARD Act added notification rules that are clearer and friendlier to cardholders, but Chase vs. McCoy centered on a previous version of the rule known as Regulation Z. The CARD Act changed the notification requirements for interest rates hikes, requiring that cardholders receive 45 days notice on any increase, including default. This decision will likely have little impact on future cases but it could impact pending cases.
James McCoy, the lead plaintiff, filed a class action suit in California against Chase Bank when his credit card interest rates were hiked retroactively after a late payment on his account. McCoy argued the rate hike violates the Truth in Lending Act and Regulation Z because Chase did not notify him of the increase until his next statement had the new rate.
Disclosure in Agreement
The district court dismissed the claim. But the 9th Circuit ruled in McCoy’s favor, finding notice was required before increasing McCoy’s interest rate, despite the default rate being previously disclosed in his credit card agreement.
Chase Bank appealed to the Supreme Court, arguing Regulation Z, as it was written prior to the amendments, did not apply to rate increases imposed under account agreements that specifically allowed the increases. The rate increase should be covered under a disclosure given to the debtor that states the rate would increase if payments were missed.
It was not changing, but merely applying, the terms of credit card agreements when it increased interest rates due to consumer default, Chase Bank argued.
The Supreme Court ruled that under the old federal regulations, the Chase cardmember agreement disclosed the terms of interest rates and the maximum rates that would apply if the terms were violated. Therefore, Chase did not have to provide written notice before raising credit card interest rates to account holders who defaulted on a payment.
Bill Hardekopf ([email protected]) is coauthor of “The Credit Card Guidebook” and chief executive of LowCards.com, a free, independent Web site that helps consumers compare credit cards for a variety of factors such as lowest rates, rewards, rebates, balance transfers, and lowest introductory rates.