Chase Bank USA v. McCoy

The Supreme Court has agreed to decide whether a creditor seeking to raise the interest rate on a credit card where the cardholder defaulted must provide the cardholder with a change in terms notice.

James McCoy filed a class-action lawsuit on behalf of himself and others similarly situated against Chase Manhattan Bank, a national bank located in Delaware.

McCoy alleged that the bank increased his interest rates retroactively to the beginning of his payment cycle after his account was closed to new transactions as a result of a late payment to Chase or another creditor.

McCoy claimed that the rate increase violated the Truth in Lending Act and Delaware law because Chase gave no notice of the increase until the following periodic statement, after it had already taken effect.

The U.S. District Court for the Central District of California dismissed McCoy’s complaint with prejudice, holding that because Chase discloses the highest rate that could apply due to McCoy’s default in its cardmember agreement with McCoy no notice was required.

But in March 2009, a divided three-judge panel on the 9th U.S. Circuit Court of Appeals held that Regulation Z of the Truth in Lending Act does requires Chase to issue a notice, even though the new rates were based on consumer default.

At the request of the U.S. Supreme Court, the Obama administration filed an amicus brief, which urged the justices to review the lower court decision and remand for further review in light of Federal Reserve Board’s authoritative interpretation of the relevant regulations.

On June 21, the high court agreed to hear the case.

Question presented: When a creditor increases the periodic rate on a credit card account in response to a cardholder default, pursuant to a default rate term that was disclosed in the contract governing the account, does Regulation Z, 12 C.F.R. § 226.9(c), require the creditor to provide the cardholder with a change-in-terms notice even though the contractual terms governing the account have not changed?