Defunct Credit Card Statute Places Supreme Court in Banks' Corner Against Consumers

The Supreme Court ruled today in Chase Bank v. McCoy in favor of Chase Bank’s right to impose retroactive interest rate increases without notice on consumer credit cards under an overturned law. The replaced statute, and the Federal Reserve’s bank-friendly interpretation of it, essentially dictated the unfavorable outcome.

The Truth in Lending Act required credit card companies to provide written notice prior to the effective date of an interest rate change, but allowed an exception where the fine print of the credit card agreement specified events that would trigger an increase, including failure to make a payment. In this case, Chase’s credit card agreement with the plaintiff gave the bank broad discretion to increase interest rates up to a maximum rate based on various factors, and when the plaintiff missed a payment, Chase Bank dramatically increased his rates, applying those rates retroactively to his existing balance. Chase defended plaintiffs’ class action lawsuit on the grounds that a regulation under the Truth in Lending Act, as it was interpreted at the time, allowed this practice.

The Court held that the Federal Reserve Board’s regulations implementing the Truth in Lending Act were too ambiguous to determine whether notice was required in this situation. Therefore, the Court deferred to the Federal Reserve’s position as to how it interpreted those regulations at the time the plaintiff’s complaint arose. Ironically, the Federal Reserve’s interpretation of the Truth in Lending Act began to change in consumers’ favor after Mr. McCoy's complaint, but this new interpretation was not applied retroactively, whereas Chase Bank is allowed under this decision to apply huge rate increases retroactively to consumer credit card balances.

In May 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure Act. The Act increases to 45 days the amount of time required for notice of interest rate increases. In addition, it explicitly applies to increases that result from delinquency, default, or “events specified in the account agreement, such as making a late payment…” The new Obama era statute protects consumers from sudden and retroactive rate increases hidden in fine print. Unfortunately, today’s Supreme Court decision provides no assistance to individuals who suffered large interest rate increases under the previous law.