The US Supreme Court [official website] ruled [opinion, PDF] unanimously Monday in Chase Bank v. McCoy [Cornell LII backgrounder; JURIST report] that Chase was not required to provide a cardholder with a change-in-terms notice before raising the interest rate on his credit card. The case required the court to determine whether an interest rate increase constituted a "change in terms" under Regulation Z, 12 CFR § 226.9(c) [text], which requires that a creditor provide a cardholder with a change-in-terms notice when the contractual terms governing the account have changed. The parties disputed the proper interpretation of the regulation with cardholder James McCoy arguing that the plain text indicates a change in the periodic interest rate resulting from a cardholder's default is a "change in terms" requiring notice. The court, however, adopted the interpretation advocated by Chase. Justice Sonia Sotomayor, writing for the court, stated:
We recognize that McCoy's argument has some force; read in isolation, the language quoted above certainly suggests that credit card issuers must provide notice of an interest-rate increase imposed pursuant to cardholder delinquency or default. But McCoy's analysis begs the key question: whether the increase actually changed a "term" of the Agreement that was "required to be disclosed under § 226.6." If not, § 226.9(c)'s subsequent notice requirement with respect to a "change in terms" does not apply. Chase argues precisely this: The increase did not change a term in the Agreement, but merely implemented one that had been initially disclosed, as required. This interpretation, though not commanded by the text of the regulation, is reasonable.Sotomayor went on to provide further justification for the court's interpretation of Regulation Z by stating that, when a regulation is ambiguous with regards to a question presented to the court, it is required to look to the issuing body's interpretation for guidance. In this case, the court deferred to the interpretation of the Federal Reserve Board [official website], which it found to be in line with the regulatory text.
The interpretation of the Supreme Court is in contrast to that of the US Court of Appeals for the Ninth Circuit, which previously found [opinion, PDF] that Regulation Z does require the creditor to provide the cardholder with a change-in-terms notice where the cardholder has defaulted, triggering an increase in the interest rate. However, it is in line with that of the US District Court for the Central District of California [official website], which originally dismissed McCoy's complaint on the grounds that the increased interest rate was not a "change in terms" and did not require Chase to provide prior notice.