Credit Card Rate Increase Was OK, High Court Rules

(CN) - Credit card companies do not need to notify customers about interest-rate increase for payment default if they disclosed the risk of an increase in the credit card agreement, the Supreme Court on Monday.

Chase Bank had asked the high court to weigh in after the 9th Circuit ruled 2 to 1 for the bank's customer, James McCoy, who claimed that Chase should have provided notice before increasing his rate, even though a default rate was previously disclosed.

The federal appeals panel based its decision in part on commentary from the Federal Reserve System board interpreting of Regulation Z, which states that a credit card company must give notice of a rate increase arising from a "consumer's delinquency or default."

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act, which required 45 days advance notice of interest rate increases and significant changes in terms. Chase charged the rates in question before the act took effect, however.

McCoy claimed that a retroactive rate increase on his Chase Bank USA credit card due to a late payment violated the Truth in Lending Act. The district court dismissed McCoy's class action, saying Chase did not have to provide notice because the card agreement stated a possible rate increase with a maximum rate if there were a default.

During oral arguments before the Supreme Court, the justices debated how much deference the court owed to the Federal Reserve in interpreting its own regulations and whether the wording of the only requires the company to disclose that rates "may" be charged, not that they actually were charged.

The court's ruling, written by Justice Sonia Sotomayor, notes that McCoy had a compelling argument but that the regulation's wording was too ambiguous to be definitive.

Looking to the board's own interpretation of its ruling, submitted in an amicus brief on behalf of Chase, Sotomayor agreed that the 9th Circuit erred in concluding the regulation's meaning.

"McCoy may well be correct in asserting that it is better policy to oblige credit-card issuers to give advance notice of a rate increase; after all, both Congress and the board have recently indicated that such a requirement is warranted," Sotomayor wrote. "That Congress and the board may currently hold such views does not mean, however, that deference is not warranted to the board's different understanding of what the pre-2009 version of Regulation Z required."

Sotomayor added that the commentary on which the 9th Circuit relied was too ambiguous to resolve uncertainty over the regulation and that the court's best guide in determining the case was the board's amicus brief.

"Today we decide only that the amicus brief submitted by the board is entitled to deference in light of 'the circumstances of this case,'" the ruling states. "Accordingly, we conclude that, at the time of the transactions at issue in this case, Regulation Z did not require Chase to provide McCoy with a change-in-terms notice before it implemented the agreement term allowing it to raise his interest rate following delinquency or default."

The case now returns to the 9th Circuit for further proceedings.

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