The U.S. Supreme Court heard oral arguments in a case that will decide what notice credit card companies must give to consumers about interest rate increases under a now-changed federal regulation.
Although the law has been amended, the case remains closely watched because credit card companies can still face litigation under the previous version of the rule known as Regulation Z.
The plaintiff in Chase Bank USA v. McCoy, James McCoy, sued Chase when his credit card interest rates were hiked retroactively as a result of a late payment on his credit card account.
He alleged that the rate hike violated the Truth In Lending Act and Regulation Z because Chase provided no notice of the increase until the following periodic statement, after it had taken effect.
At the time, Regulation Z required creditors to disclose the circumstances under which rate hikes would be imposed, and to give notice at least 15 days prior to any rate increase.
Chase argued that a disclosure given to the debtor stated that the rate would increase if payments were missed, and therefore both regulations were satisfied.
The district court dismissed the claim, but the Ninth Circuit reversed, holding that a cause of action existed and reviving a putative class action against Chase.
The Supreme Court granted certiorari.
‘Not a crystal-clear regulation’
At oral arguments this week, Seth P. Waxman, a partner in the Washington office of WilmerHale, argued on Chase’s behalf that, in amicus briefs, “the Federal Reserve Board has confirmed that it has long interpreted its regulation just as Chase Bank and the rest of the regulated credit card industry understood.”
“You are recognizing that this is not a crystal-clear regulation,” said Justice Ruth Bader Ginsburg. “There is some ambiguity.”
“We acknowledge [that] there is some ambiguity” but Chase’s interpretation is “entirely consistent with explanations that the Board provided in the course of its rulemaking,” Waxman said.
Justice Samuel Alito noted that under its interpretation, Chase could initially disclose that it might raise rates based on failed payments to other accounts unrelated to the credit card, and then boost a fee without another notice.
“The cardholder, thinking that he or she has made all Chase payments on time, is not going to be alerted to the fact that there may be an increase in the rate,” Alito said. “So how is that cardholder going to realize what has happened?”
“The Reg Z commentary was clear that [it must] specify in the initial disclosures … the precise triggering event [and] here there is no doubt that it was specified that what constitutes a default is failure to make a payment to any creditor,” Waxman said.
Gregory A. Beck, a staff attorney at Washington, DC-based Public Citizen, argued that the regulations specifically required disclosure of a change in interest rate before it goes into effect.
“In fact, the interest rate is the most important disclosure,” Beck said.
Justice Antonin Scalia cited Chase’s statement that interest rates “may” increase up to a certain percentage.
“But I don’t think the word ‘may’ here can be read to exclude the requirement that the bank also disclose the rates that are charged,” Beck said.
“No, you’re the one that’s reading it to say something different from what it says,” Scalia said.
“The reason the word ‘may’ has to be there is because it’s quite possible that a rate [increase] may never come into play,” Beck said.
“You are trying to make the argument that it’s clear,” Scalia persisted. “The fact that it says ‘may be charged’ alone makes it unclear, it seems to me.”
A decision is expected later this term.