Yesterday the United States Supreme Court unanimously ruled that the pre-2009 version of Reg Z did not require a new notice to be given when a creditor raises the interest rate on a credit card account in response to a cardholder default. Although the case was decided under now repealed law, it is important for a couple of reasons. First, it resolves a split in the circuits about how to interpret certain Federal Reserve Board (“Board”) regulations called Reg Z which were promulgated to implement the Truth in Lending Act. Second it gives additional guidance on how the courts should defer to a federal agency’s interpretation of its own ambiguous regulation.
The case – Chase Bank v. McCoy – has limited usefulness on the direct issue of when a “change in terms” notice is required. The Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) of 2009 eliminated the dispute McCoy raised. The Credit CARD Act now clearly mandates a notice in the situation McCoy presented.
McCoy filed a class action lawsuit against Chase Manhattan Bank U.S.A. alleging that it failed to notify members of the class that it was raising their credit card interest rate based on their defaults and late payments. The bank argued it was not required to notify cardholders of the change because the possibility of such rate increases and the maximum possible rate had previously had been disclosed to the customers in the cardholder agreements.
McCoy argued that the Board’s Official Staff Commentary to Reg Z supported the position that banks were required to disclose interest rate increases based on a consumer default, at the latest, by the day the rate was increased. Both sides cited authority within Reg Z or the Official Staff Commentary to support their positions.
The Court ultimately concluded that raising an interest rate in a manner described in a cardholder agreement is not a “change in terms” which required a new disclosure. While this case settled this split in the circuits, it has probably limited value on a go forward basis regarding the specific issue presented due to the passage of the Credit CARD Act.
The case is important though for another reason. It describes what level of interpretive deference courts should give to the briefs federal agencies file. In this case, the Court found that Reg Z was unclear with respect to the critical question of whether the interest rate increase at issue constituted a “change in terms” requiring notice, but said:
“We need not decide which party’s interpretation is more persuasive, however; both are plausible, and the text alone does not permit a more definitive reading. Accordingly, we find Regulation Z to be ambiguous as to the question presented, and must therefore look to the Board’s own interpretation of the regulation for guidance in deciding this case.”
In looking for that interpretation, the Court relied on the Board’s amicus brief submitted in support of Chase’s position. The brief argued that Chase was not required to give McCoy or the class notice of the interest rate increase under the version of Reg Z applicable at the time. The Court said:
“Because the interpretation the Board presents in its brief is consistent with the regulatory text, we need to look no further in deciding this case. . . . Responding to the petitioners’ objection that the agency’s interpretation came in a legal brief, we held [in a prior case] that this fact did not, “in the circumstance of this case, make it unworthy of deference.”
Because the Board’s position was not a “post-hoc rationalization” seeking to defend a past agency action from attack, the Court said there was no reason to suspect that the interpretation did not reflect the agency’s “fair and considered judgment” on the matter in question. Thus, while the McCoy case may have limited utility with respect to the “change in terms” issue, its interpretation regarding the deference courts are required to give to agency amicus briefs (and presumably other writings) will likely guide courts for years to come.