The recent decision by the United States Supreme Court in Chase Bank USA, NA v. McCoy provides limited relief to lenders worried that pre-2009 regulations might be viewed and interpreted through the prism of the policy considerations underlying the Credit CARD Act of 2009 or the Board's 2009 amendments to Regulation Z. Significant questions will remain concerning how Chase Bank will affect the review and interpretation of subsequent financial regulations, especially those promulgated by the nascent Consumer Financial Protection Bureau ("CFPB"). The case resolves a circuit court split by holding that, pursuant to an initial agreement, downgrading a delinquent cardholder to a "non-preferred" rate does not constitute a change in terms under Regulation Z of the Truth in Lending Act ("TILA").
Chase Bank centers on two specific provisions of Regulation Z. The first requires credit card issuers to make "initial disclosures" to consumers, including each "periodic rate" used in calculating the card's finance charge. The second demands that the card issuer provide advance written notice to the consumer if the required "terms" change. Prior to 2009, however, card issuers were not required to give advance notice if a periodic rate change resulted from the consumer's own "default or delinquency." That changed in 2009 when the Board revised Regulation Z to require 45 days' advance notice prior to increasing interest rates.
Still, the previous rule continued to be the subject of significant litigation in cases filed prior to 2009. In 2004, James McCoy brought a class action against Chase Bank in California state court claiming that the bank had increased his credit card interest rate after he fell into default or delinquency. Despite the "default or delinquency" provision, McCoy argued the rate increase warranted a "change-in-terms notice." The bank removed the case from state court to the District Court for the Central District of California, which dismissed the complaint.
A divided panel for the Ninth Circuit reversed, holding that the interest rate increase required a change-in-terms notice to McCoy and other class members. The majority relied heavily on proposed amendments issued by the Board in 2004 and 2007, in which the Board first contemplated requiring advance notice for rate increases.
The Ninth Circuit's decision led to a split among circuit courts over whether a rate increase constituted a change in terms requiring written notice to each affected customer. Previously, in Swanson v. Bank of America, N.A., the Seventh Circuit reached a different conclusion in a nearly identical case. After noting the ambiguities in both Regulation Z and the Board's commentary, the court concluded that this ambiguity "provides no good reason to override the contract" between the bank and its customer. To support its conclusion, the court relied on the Board's newly instituted 45-day notice requirement for rate increases, reasoning that "it would be inappropriate to give this new language retroactive effect" by reading Regulation Z as if that requirement "had been there all along." The court later denied Swanson's petition for rehearing despite the Ninth Circuit's contrary decision in Chase Bank.
Likewise, in Shaner v. Chase Bank USA, N.A., the First Circuit held that banks need not give a change-in-terms notice prior to applying higher rates of interest to credit card balances. The court agreed with the Seventh and Ninth Circuits that Regulation Z presented an internal conflict. The court then resolved that conflict by referencing an amicus brief filed by the Board at the court's request. The Board explained in its brief that an interest-rate increase does not amount to a "change in terms" triggering advance notice; rather, the rate increase implements "non-preferred" terms initially disclosed in the credit card agreement. The Board stated, "[w]hen a cardholder agreement identifies a contingency that triggers a rate increase, and the maximum possible rate the issuer may charge if that contingency occurs ... no change-in-terms notice is required."
On January 24, 2011, a unanimous Supreme Court resolved the circuit split by reversing the Ninth Circuit's decision in Chase Bank. Writing for the Court, Justice Sotomayor acknowledged that the provisions of Regulation Z requiring initial disclosure of periodic rates and change-in-terms notice presented an inherent conflict. While the Court accepted that a rate increase does not alter the "terms" of the credit card agreement themselves, the Court could not explain why the advance notice provision made specific reference to interest rate increases. In short, the provisions were genuinely ambiguous.
Chase Bank is significant for how the Court resolved that ambiguity. The Court reaffirmed its pronouncement in Auer v. Robbins that it will defer to an agency's interpretation of its own regulation advanced in an amicus brief, unless that interpretation amounts to "post hoc" rulemaking, is "plainly erroneous," or is otherwise inconsistent with the regulation. The Court reasoned that because the Board was not a party and the interpretation of Regulation Z it advanced in its amicus brief squared with language in its 2004 and 2007 proposed amendments, the Board's amicus brief deserved deference like that given in Auer. The Court dismissed the idea that policy concerns addressed in either the Credit CARD Act of 2009 or the Board's 2009 amendment to Regulation Z warranted a different understanding of the pre-2009 rules. It also distinguished previous instances in which Auer deference was denied.
Lenders should take solace in Chase Bank's determination that pre-2009 regulations should not be interpreted in accordance with the policy considerations underlying the Credit CARD Act of 2009 or the Board's 2009 amendments to Regulation Z. However, the lingering question is how Chase Bank will affect subsequent financial regulations, especially those promulgated by the nascent CFPB. The Bureau assumes full regulatory powers on July 21, 2011 and, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, will unify authority over the nation's financial products and services industry in a single federal agency. If the Court continues to give deference to amicus briefs submitted by financial regulatory authorities, the CFPB could become a significant force in both promulgating regulations and swaying private litigation.