The legislative and executive branches of our government have forced a number of changes onto credit card issuers over the past two years. The judicial branch could soon join in.
On December 8, The United States Supreme Court heard oral arguments in Chase Bank USA v. McCoy, a case that could set a precedent for the notice credit card companies must give consumers about interest rate increases. An important issue is 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.
In 2010, the CARD Act added notification rules that are much clearer and friendlier to cardholders, but Chase vs. McCoy is important because credit card companies can still face litigation under the previous version of the rule known as Regulation Z.
James McCoy, the 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 credit card account. McCoy argued that 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.
The district court dismissed the claim. But the 9th Circuit ruled in favor of McCoy, finding that 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 that 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.
The Supreme Court decision is expected later this term. Its ruling could decide whether the changes in the CARD Act clarified the old Regulation Z or changed its meaning.
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