Lender’s Disclosures that APR may Increase based on Information in Credit Report not Clear and Conspicuous Within Meaning of TILA so District Court Erred in Dismissing Class Action Complaint Ninth Circuit Holds
Plaintiffs filed a class action against Chase Bank alleging violations of the federal Truth in Lending Act (TILA), and Regulation Z promulgated thereunder; the class action complaint alleged that plaintiffs “have been the victims of a practice they now call ‘adverse action repricing,’ which apparently means ‘raising . . . a preferred rate to an essentially non-preferred rate based upon information in a customer’s credit report.’” Barber v. Chase Bank USA, N.A., 566 F.3d 883 (9th Cir. 2009) [Slip Opn., at 5996 ]. Specifically, Chase increased plaintiffs’ annual percentage rate (APR) on their outstanding credit card balance from 8.99% to 24.24% based on information obtained from a consumer credit reporting agency; Chase stated that it increased the interest rate “‘outstanding credit loan(s) on revolving accounts . . . [were] too high’ and there were ‘too many recently opened installment/revolving accounts.’” Id., at 5995-96. The class action did not allege that Chase’s practice of increasing the APR based on information in a consumer’s credit report was illegal, but rather that Chase violated federal law by failing to fully disclose it to them. Id. Defense attorneys moved to dismiss the class action complaint for failure to state a claim; the district court agreed with Chase and dismissed the class action. Id., at 5997. Plaintiffs appealed, and the Ninth Circuit reversed.
The Ninth Circuit explained, “We must decide whether a credit card company violates the Truth in Lending Act when it fails to disclose potential risk factors that allow it to raise a cardholder’s Annual Percentage Rate.” Barber, at 5994. Given the purpose of TILA – viz., “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit,” 15 U.S.C. § 1601(a) – the Ninth Circuit reversed. The Circuit Court explained that TILA requires disclosure of “[t]he conditions under which a finance charge may be imposed,” “[t]he method of determining the amount of the finance charge,” and, “[w]here one or more periodic rates may be used to compute the finance charge, each such rate . . . and the corresponding nominal annual percentage rate.” Barber, at 5998 (quoting § 1637(a)(1), (a)(3) & (a)(4)). And under Reg. Z, “creditors must make the required disclosures ‘clearly and conspicuously in writing.’” Id., at 5999 (quoting 12 C.F.R. § 226.5(a)(1)). According to the class action, “Chase failed to disclose completely under the Act why it would change the APRs of its cardholders, in violation of subsection 226.6(a)(2) of Regulation Z.” Id., at 6000.
In the Ninth Circuit’s words, “the gravamen of the [class action] complaint is that Chase did not disclose that if a cardholder’s credit report revealed certain information, what Chase calls ‘risk factors,’ the APR might go up.” Barber, at 6000. The Circuit Court agreed, explaining at page 6001, “even if the creditor could not know what a potential increased rate would be when it made the original disclosures, ‘the creditor must provide an explanation of the specific event or events that may result in the increased rate.’” (Quoting 12 C.F.R. Pt. 226 Supp. I, par. 6(a)(2) cmt. 11.) The Court rejected defense arguments that Chase was relying on information “too general to fall under the meaning of ‘specific events,’” id., at 6001; the class action plaintiffs “specifically accuse Chase of having a pre-existing program, at the time of the Agreement, whereby it planned to raise their APR if certain risk factors appeared in their credit history,” id., at 6002. The Ninth Circuit found that even this need not be disclosed, id., 6002-03. The question was, “what disclosures Chase must have made in order to disclose clearly and conspicuously what Regulation Z does demand: namely, any APR ‘that may be used.’” Id., at 6003 (quoting 12 C.F.R. § 226.6(a)(2)) (italics added by Court). As a matter of first impression, the Circuit Court held at page 6006, “Clear and conspicuous disclosures, therefore, are disclosures that a reasonable cardholder would notice and understand. No particular kind of formatting is magical…, but, in this case, the document must have made it clear to a reasonable cardholder that Chase was permitted under the agreement to raise the APR not only for the events of default specified in the ‘Finance Terms’ section, but for any reason at all.” (Citation omitted.) More specifically, the provision relied on by Chase was “buried too deeply in the fine print for a reasonable cardholder to realize that, in addition to the specific grounds for increasing the APR listed in the ‘Finance Charges’ section, Chase could raise the APR for other reasons.” Id., at 6007. Accordingly, the allegations of the class action complaint did not fail as a matter of law, necessitating reversal of the district court order. Id.