Barrer v. Chase Bank USA, N.A.Barrer v. Chase Bank USA, N.A.
Lead Opinion
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.
I
A
Walter and Cheryl Barrer held a credit card account with Chase.
According to the Barrers’ First Amended Complaint (which is the operative complaint), they enjoyed a preferred APR of 8.99% under the Agreement. In a section entitled “Finance Charges,” the Agreement provided a mathematical formula for calculating preferred and non-preferred APRs and variable rates. In the event of default, the Agreement stated that Chase might increase the APR on the balance up to a stated default rate. The Agreement specified the following events of default: failure to pay at least a minimum payment
Another section entirely, entitled “Changes to the Agreement,” provided that Chase “can change this agreement at any time, ... by adding, deleting, or modifying any provision. [The] right to add, delete, or modify provisions includes financial terms, such as APRs and fees.” The next section, entitled “Credit Information,” stated that Chase “may periodically review your credit history by obtaining information from credit bureaus and others.” These sections appeared five and six pages, respectively, after the “Finance Charge” section.
Around April 2005, the Barrers’ noticed that their APR had “skyrocketed” from 8.99% to 24.24%, the latter a rate close to a non-preferred or default rate. None of the events of default specified in the Agreement, however, had occurred. When the Barrers contacted Chase to find out why their APR had increased, Chase responded in a letter citing judgments it had made on the basis of information obtained from a consumer credit reporting agency. In particular, Chase wrote that: “outstanding credit loan(s) on revolving accounts ... [were] too high” and there were “too many recently opened installment/revolving accounts.” The Barrers do not dispute the facts underlying Chase’s judgments.
Despite the Barrers’ surprise, the Notice they had received in February contained some indication of what would be forthcoming. Specifically, it disclosed that Chase would shortly increase the APR to 24.24%, a decision “based in whole or in part on the information obtained in a report from the consumer reporting agency.”
The Barrers paid the interest on the credit account at the new rate for three months before they were able to pay off the balance. Then they sued Chase in federal district court.
B
The Barrers filed a class action lawsuit on their own behalf and on behalf of all Chase credit card customers similarly harmed and similarly situated. The complaint asserted one cause of action under the Truth in Lending Act (“the Act”),
Chase moved to dismiss the Barrers’ cause of action for failure to state a claim under the Act, or alternatively to compel arbitration in accordance with the terms of the Agreement’s arbitration provision. The magistrate judge recommended in favor of Chase on both motions. Because the district court agreed that the Barrers’ cause of action should be dismissed, and their case with it, it never reached the magistrate judge’s recommendation regarding Chase’s motion to compel arbitration, but simply entered judgment for Chase.
The Truth in Lending Act is designed “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.”
In general, the Act regulates credit card disclosures at numerous points in the commercial arrangement between creditor and consumer: at the point of solicitation and application, at the point the consumer and the creditor consummate the deal, at each billing cycle, and at the point the parties renew their arrangement.
Regulation Z,
Just as
Creditors are not required to be clairvoyant, however, for “[i]f a disclosure becomes inaccurate because of an event that occurs after the creditor mails or delivers the disclosures, the resulting inaccuracy is not a violation of [Regulation Z].”
Finally, although the text of the Act and regulations governs, we construe that text in favor of the cardholder by strictly enforcing its regulation against the creditor. Jackson v. Grant,
Ill
The Barrers argue that Chase consciously shielded its “adverse action repricing” program from its customers, deceiving them as to why their APRs might increase. To phrase it in the language of the Act, they allege that 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.
The Barrers do not argue that either the Agreement or the Notice failed to disclose the APR, which their complaint puts at 8.99% under the Agreement and 24.24% under the Notice. Rather, they argue that Chase violated the Act by failing to disclose “(1) the existence of the [adverse action re-pricing] practice; (2) the credit factors that trigger an adverse action reprice of a customer’s preferred APR; and (3) that information obtained from a consumer’s credit report will be used for this purpose.” Thus, the gravamen of the Barrers’ 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.
Subsection 226.6(a)(2) states that “[t]he creditor shall disclose to the [cardholder] ... each periodic rate that may be used to compute the finance charge ... and the corresponding annual percentage rate.” There is, again, no dispute that Chase disclosed the new APR after it had calculated it and before it went into effect. Comment 11, however, indicates that more is required. Most importantly, 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.” 12 C.F.R. Pt. 226 Supp. I, par. 6(a)(2) cmt. 11. According to the Barrers, the risk factors that Chase considered under its adverse action repricing program are “specific events that may result in the increased rate,” and Chase had to disclose them.
Chase counters that the risk factors are too general to fall under the meaning of “specific events.” It points to the .examples of events comment 11 provides: late payments and credit draws in excess of the credit limit. By contrast, Chase claims, the reasons the complaint alleges Chase raised APRs are more like judgment calls, assessments of a cardholder’s risk as the credit history unfolds: outstanding credit loans on revolving accounts that were “too high”; “too many recently opened installmeni/revolving accounts”; debts on loan finance trades that were “too high”; or an average time accounts had been opened that was “too short.” Chase contends that it needs flexibility to adjust the terms on which it offers credit according to such risk factors, but that it cannot possibly disclose every factor it might consider because the list is potentially infinite and constantly changes as market conditions change.
We recognize that, as we noted above, neither the Act nor Regulation Z demands clairvoyance from creditors. The comments specifically contemplate general reservation clauses, and Regulation Z recognizes that subsequent events, specific or not, can render inaccurate a creditor’s initial disclosures and require new ones. See 12 C.F.R. Pt. 226 Supp. I, par. 9(c), cmt. 1;
But even if Chase did maintain such a program,
B
Comment 11, however, does not exhaust the requirements that Chase'had to meet. Regulation Z also requires that creditors disclose any APR “that may be used to compute the finance charge,” and that they do so “clearly and conspicuously.”
1
We have yet to determine the meaning of the word “may” in subsection 226.6(a)(2), but one of our sister circuits has done so. In Rossman v. Fleet Bank, the Third Circuit rejected the argument that the word means “might ever be” at some future date, because Regulation Z explicitly contemplates that creditors will make changes to an agreement “that do not affect the accuracy of a previous disclosure.”
We are persuaded by this interpretation. Although our recent Hauk opinion disagreed with the reasoning of Rossman in some respects, see Hauk,
2
Chase argues that the Agreement permitted it to change the Barrers’ APR on the basis of risk factors that it discovered in their credit history, by virtue of the reservation of the right to change terms (“change-in-terms provision”). Furthermore, Chase contends that the disclosure of that contractual right, coupled with the disclosure that Chase would periodically
a
We are persuaded that Chase adequately disclosed the APRs that the Agreement permitted it to use simply by means of the change-in-terms provision. That provision reserved Chase’s right to change APRs, among other terms, without any limitation on why Chase could make such a change. The provision thus disclosed that, by changing the Agreement, Chase could use any APR, a class of APRs that logically includes APRs adjusted on the basis of adverse credit information. Apart from the gloss of Comment 11, neither the Act nor Regulation Z require Chase to disclose the basis on which it would change or use APRs.
b
Even so, such disclosure must be clear and conspicuous.
Clear and conspicuous disclosures, therefore, are disclosures that a reasonable cardholder would notice and understand. No particular kind of formatting is magical, see Bassett,
Although “[w]e decide conspicuousness as a matter of law,” Bassett,
Therefore, the Barrers have stated a claim because Chase cannot show that, as a matter of law, the Agreement made clear and conspicuous disclosure of the APRs that Chase was permitted to use.
IV
For the foregoing reasons, we reverse the district court’s grant of Chase’s motion to dismiss for failure to state a claim and remand for further proceedings.
REVERSED and REMANDED.
Notes
. According to Chase, the account was in Walter Barrer’s name only; Cheryl Barrer was an "Authorized User,” and therefore not legally responsible for the account. For simplicity's sake, we refer to the couple collectively as "the Barrers.”
. In their briefs, the Barrers challenged the magistrate judge’s conclusion regarding
. The Act defines an "open end credit plan” as "a plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance.”
. "Unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dispositive....” Ford Motor Credit Co. v. Milhollin,
. Subsection 226.5(a)(2) also requires that the finance charge and APR, "when required to be disclosed with a corresponding amount or percentage rate, shall be more conspicuous than any other required disclosure." This provision does not apply here, however, because we do not address the required disclosure of a specific APR. We therefore express no opinion on it, beyond clarifying its non-application to this case.
. The complaint also claimed, in the alternative, that "to the extent Chase has issued subsequent disclosures that purported to increase Plaintiffs’ and the Class’ APR based on factors, events, or circumstances not reflected in the original [Agreement], ... such disclosures violate [the Act] and Regulation Z in that they fail to accurately reflect the legal obligations of the parties.” We do not reach this theory of liability, premised on allegedly inaccurate disclosure in the Notice in violation of
. Because we are at the Rule 12(b)(6) stage, we take this allegation as true.
. The Barrers point to the language of subsection 226.6(a) requiring disclosure of "[t]he circumstances under which a finance charge will be imposed and an explanation of how it will be determined.” But that phrase is immediately followed by the words, "as follows,” and a list of specific requirements. Thus, only the items enumerated in the list must be disclosed. Disclosure of the basis for increases in a periodic rate (such as an APR) is not on that list.
. Although we construe the Act liberally in favor of the consumer, see Jackson,
Furthermore, we recently concluded that "a creditor's undisclosed intent to act inconsistent with its disclosures is irrelevant in determining the sufficiency of those disclosures under section[] ... 226.6 [of Regulation Z].” Id. at 1122. If that is true, it would be odd to say that a creditor's undisclosed intent to pursue a particular a course of action consistent with its disclosures, though somewhat more specific than the general policy that was disclosed, was not only relevant to determining the sufficiency of those disclosures, but actually causes them to violate
Finally, Judge Graber worries that our interpretation would open the door for creditors to adjust the terms of a credit agreement for such bizarre reasons as the color of the cardholder's hair. See Partial Dissent at 893. We do not have such a freakish fact pattern before us, but we doubt that Regulation Z would permit a creditor to use a general change-in-terms provision to punish a cardholder on any whim whatsoever. Recall that Comment 11 requires the disclosure of the "specific event or events that may result in the increased' rate.” 12 C.F.R. Pt. 226 Supp. I, par. 6(a)(2) cmt. 11; see also supra, at 888-90. Our conclusion that Comment 11 does not require the disclosure of risk-based pricing rests, in part, on the fact that pricing credit on the basis of cardholder risk is how credit card companies normally do business. Clearly, the same could not be said for pricing credit on the basis of hair color or any other peccadillo that might offend some over-punctilious creditor.
Concurrence Opinion
concurring in part and dissenting in part:
I concur in the opinion, with the exception of Parts III.A and III.B.2.a. To those portions of the opinion, I respectfully must dissent. Display (e.g., size and font of the print) and placement are not the only defects in the Chase Agreement. Rather, in the procedural posture of this case, I would conclude that the disclosures are not only unclear and inconspicuous, but also substantively insufficient under Regulation Z.
As the majority correctly observes, the Truth in Lending Act (“TILA”) is designed “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit
Chase has little or no incentive to limit its own ability to change a customer’s APR or to inform its customers of its plans. By failing to read Regulation Z in a manner that requires credit card companies to give meaningful information to customers, the majority effectively has let the fox guard the henhouse and has disregarded the purpose of TILA.
I would hold instead, at the pleading stage, that Chase’s disclosures were not necessarily substantively adequate as a matter of law. As the opinion notes, we must take as true the allegations of the complaint, because the case comes to us on a motion to dismiss under
Although the majority rests its conclusion about the substantive adequacy of the disclosure solely on the change-in-terms provision, maj. op. at 890-91, I am uncertain that even a combination of the change-in-terms provision and the credit history monitoring term would suffice to meet Regulation Z’s standards. Even if those two terms had appeared together, in large bold print, it is not clear to me that the combination would have informed the Barrers adequately that Chase could change their APR on the basis of particular types of adverse information in their credit history reports. That is, assuming that the Barrers read and understood each provision correctly, I doubt that they could be expected to put both terms together to reach the understanding that Chase and the majority deem obvious: that Chase could raise their APR based on information it receives from routine credit moni
In addition to ensuring fairness and allowing for comparison shopping, one reason to require disclosure is to permit consumers to conform their behavior to the information — for example, to refrain from dyeing their hair red or from opening additional credit card accounts, so as to avoid an increase in their APR. In my view, the content of the Chase Agreement is too vague and general to allow a reasonable, average consumer to understand the terms and adjust his or her behavior accordingly. Cf. Hauk v. JP Morgan Chase Bank USA,
Of course, the evidence may demonstrate that there was no pre-existing program as alleged, in which case there was nothing to disclose. But we cannot make that assumption because we must deem the Barrers’ allegations to be true. If there were such a program as alleged, its content would have to be disclosed both truthfully and conspicuously. I therefore dissent from Parts III.A and III.B.2.a.
. The allegation that "Chase ... uses [information from consumer credit reports] to deem customers in default, based on credit events that existed prior to the extension of credit,” Complaint at ¶ 24, is particularly troubling because it suggests that Chase knew of negative credit events that would result in its raising the Barrers' APR, even before it extended credit to them at a lower rate.
. The requirement that I am suggesting would not be onerous. Here is one illustration: "Chase may raise your interest rate if it learns, from reviewing consumer credit reports about you, that you have opened a large number of credit accounts, that you are carrying a large amount of debt, or that your credit history is less than fully satisfactory in any other way, even if the credit reports concern events that happened before you signed this Agreement.”