WASHINGTON (CN) – The Supreme Court on Wednesday considered whether credit card companies must provide customers with notice of an interest rate increase for payment default if the risk of an increase was initially disclosed in the credit card agreement.
Plaintiff James 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 complaint, 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.
The 9th Circuit ruled 2 to 1 in favor of McCoy, saying that Chase was required to provide notice before increasing McCoy’s rate, even though a default rate was previously disclosed. The 9th Circuit found support in Federal Reserve staff commentary interpreting Regulation Z, which states that a credit card company must give notice of a rate increase arising from a “consumer’s delinquency or default.”
Several justices tried to determine how much deference the court owed to the Federal Reserve in interpreting its own regulations, looking to the staff comments explaining Regulation Z.
Justice Ruth Bader Ginsburg argued that the court owed deference to the Federal Reserve board.
“[S]urely the board that wrote the rule is first and foremost the proper interpreter,” Ginsburg said to Chase’s arguing attorney, Seth Waxman.
Waxman argued that a rate increase was not a change in contractual terms since Chase already disclosed the chance of an increase due to customer default.
Justice Elena Kagan posed a hypothetical in which the card issuer said rates would increase up to 300 percent if one of 50 triggering events occurred. She asked if the company would have to provide notice if one of the events occurred, pushing the interest rate up to 42 percent.
Justice Department Attorney Joseph Palmore, arguing in support of Chase, said the company would not have to provide notice under the old rules. 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.
McCoy’s attorney, Gregory Beck, said notice is required when there is a change of terms, including a change in “each periodic rate that may be used to compute the finance charge.”
Justice Antonin Scalia pointed out that the rule meant the company only had to disclose the rates that “may” be charged, not the rates that were actually charged.
“[Y]ou’re the one that’s reading it to say something different from what it says,” Scalia said to Beck. “It says the rates that may be charged. That’s the term, ‘these rates may be charged.’ That term hadn’t been changed. You want to change it to ‘the rates that are charged.'”
Beck said the word “may” was used not to exclude rates that are charged, but to include the possibility that a rate may not come into play, such as a rate that comes into effect after six months, but doesn’t apply to a customer who cancels the credit card before the six months are up.
“Well, it’s at least a horse race,” Scalia said, adding that it was back to a question of how much to defer to the board.
The case is Chase Bank USA v. McCoy, no. 09-329.