The Ninth Circuit has ruled that a credit card issuer violated the Truth in Lending Act (TILA) because it did not make sufficiently clear and conspicuous disclosure that it might increase the interest rate for any reason through a change in terms notice. As a result, credit card issuers and other open-end creditors would be wise to review their account agreements and/or application disclosures to assess whether changes should be made to conform to the new Ninth Circuit guidance.

We believe that Barrer v. Chase Bank USA, N.A. errs in at least two respects: First, it invents a substantive disclosure requirement, not contained in TILA, Regulation Z, or the Regulation Z Commentary, to disclose not only the rates that might apply under the existing cardholder agreement but also rates that might apply after the agreement is amended. Second, it effectively concludes that a "reasonable cardholder" is not required to read the entire cardholder agreement.

The plaintiffs brought a putative class action after Chase Bank sent them a change in terms notice advising them of an increase in the APR on their credit card account as a result of negative information on their credit reports. They alleged that Chase violated TILA because, among other reasons, it had an undisclosed plan at the time they opened their account to increase their interest rate through a change-in-terms process if and when credit reports it received contained specified information.

In a May 19, 2009, ruling denying Chase's motion to dismiss, the Ninth Circuit ruled that a creditor must clearly and conspicuously disclose the possibility that rates might increase as a result of a change in terms. According to the Court, Chase did not comply with this requirement because its change in terms provision appeared "five dense pages" after the finance charge section of the cardholder agreement and was not referenced in or clearly related to that section. Thus, the Ninth Circuit concluded that a "reasonable cardholder" would not realize that Chase could change the interest rate for reasons other than those stated in the finance charge provision. While the majority rejected the further argument that TILA required Chase to disclose the reasons rates might increase, one judge disagreed, and wrote separately to suggest that the bank should have disclosed the "specific" factors that would trigger rate increases, for example, a "large" number of credit accounts, a "large" amount of debt, or a "credit history [that] is less than fully satisfactory in any other way."

While this case is troubling, it may represent a pyrrhic victory for the plaintiffs since, under TILA, statutory damages should not be available for a violation of TILA's "clear and conspicuous" requirement.  See 15 U.S.C. § 1640(a)(2); Brown v. Payday Check Advance, Inc., 202 F.3d 987, 990-91 (7th Cir. 2000). While the restrictions on rate increases recently enacted by Congress may result in fewer cases of this type, credit card issuers and other open-end creditors should nevertheless consider revisions to their account agreements and/or application disclosures to address the decision and its potential ramifications.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documentation of new consumer financial services products, its significant experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). 

For more information, please contact

Alan S. Kaplinsky            215.864.8544

Jeremy T. Rosenblum      215.864.8505

John L. Culhane, Jr.         215.864.8535

Barbara Mishkin              215.864.8528

Mark J. Furletti                215.864.8138    

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