Resolving a conflict in the circuits, on January 24, 2011, a unanimous U.S. Supreme Court ruled, in Chase Bank USA, N.A. v. McCoy, that under the Truth in Lending Act (TILA) and Regulation Z as they existed at the time, Chase Bank was not required to notify its cardholder when it increased the interest rate on his account because of his default.

Notice was not required as there was no change in terms because the credit card agreement gave Chase the right to increase the rate up to a stated maximum in such circumstances.

The Supreme Court’s ruling reversed a troubling decision of the U.S. Court of Appeals for the Ninth Circuit that had largely broken with precedent by concluding that Chase was required to notify James McCoy of the change by the date that it took effect. Although the CARD Act subsequently amended the TILA to require 45 days’ advance notice of such changes, the Supreme Court’s decision should be helpful to card issuers and other creditors involved in litigation over interest-rate increases that occurred before August 20, 2009, the effective date of that change.

The decision is also noteworthy in two other respects. First, the Court rejected the contention that no reliance should be placed on Federal Reserve Board statements outside the four corners of the “Official Staff Commentary.” Finding the relevant provisions of both Regulation Z and the “Official Staff Commentary” to be ambiguous, the Court considered the Fed’s interpretation of Regulation Z set forth in the amicus brief the Fed submitted at the Court’s invitation. After reviewing its precedents, the Court gave deference to the Fed’s view that the prior version of Regulation Z allowed default rate increases, up to a specified maximum rate, without notice.

Second, the Court undercut the Ninth Circuit’s troubling—and in our view erroneous—interpretation of Delaware law. The Delaware Banking Act allows interest rates that “vary in accordance with a schedule or formula.” Ignoring the maximum limit on the increase, and the fact that the increase would apply only in the event of a payment default, the Ninth Circuit had found that Chase’s rate provision was not authorized under Delaware law, and might be unconscionable because the rate increase was somehow “discretionary” and not tied to any “schedule or formula.”

The Supreme Court’s ruling will require the Ninth Circuit to instruct the district court how to proceed with McCoy’s unconscionability claim, as well as his state law claims for declaratory relief, damages for assessment of an illegal penalty, and breach of contract, all of which the Ninth Circuit had previously reinstated. Nevertheless, in rejecting the contention that Chase’s actions under the circumstances represented an improper exercise of discretion rather than a specific change triggered when scheduled events (payments) failed to occur, the Supreme Court's ruling should make it more difficult for a cardholder to successfully assert a violation of Delaware law based on default-related rate increases.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its 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 group Chair Alan S. Kaplinsky, 215.864.8544 or; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or




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