Recent amendments to the Truth in Lending Act, coupled with challenges to mandatory arbitration clauses and a litigation climate that favors consumer protection actions may lead to an increase in class actions and individual claims of statutory violations involving consumer credit-card agreements.
Historically, creditor violations of the Truth in Lending Act (TILA) may have resulted in civil penalties of up to $1,000. Many of these claims, however, were kept out of the courts by mandatory arbitration clauses in cardholder agreements. Today the credit card legal environment has changed dramatically with the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) as well as the impending prohibition on arbitration clauses. These recent developments come at a time when consumer protection is a focus of political discussions, potentially creating a perfect storm of cardholder litigation.
TILA: A History
Prior to the recent amendments, TILA carried relatively small civil penalties for violations of its mandatory disclosure rules. These statutory damages apply to various sections of TILA, including those requiring disclosures of certain information on customer billing statements. In addition, TILA provides for class-action lawsuits with no minimum recoveries but limits a creditor’s liability to the lesser of one percent of its net worth or $500,000. The statute also allows a consumer who prevails in a lawsuit to be awarded court costs and reasonable attorney fees, which typically constitute a majority of the damages.
Congress’s purpose in enacting TILA was to assure a meaningful disclosure of credit terms to promote the informed use of credit. So most provisions of the act involve the proper disclosures required of issuers of credit, including credit cards. Specifically, credit card companies must disclose the finance charge, balance, periodic rates, and other charges that can be imposed in a credit plan. Certain items must be provided in the customer’s billing statement as well, including 1) the amount of any finance charge; 2) the range of balances to which any varying periodic rates apply; 3) the annual percentage rate for the finance charge; 4) the balance on which the finance charge is computed; 5) the outstanding balance at the end of the billing cycle; 6) the payment due date; and 7) the creditor’s address for consumer inquiries.
To date, the claims brought by consumer credit-card holders have centered on violations of these disclosure requirements. Those claims not subject to arbitration have for the most part been successfully litigated in the courts. In fact, TILA is liberally construed in favor of consumers, with creditors who fail to comply with its provisions in any respect liable regardless of the nature of the violations or the creditor’s intent.
Recent TILA Violations
In 2000 the United States Court of Appeals for the 9th Circuit reversed a district court grant of summary judgment in favor of defendant Capital One Bank and held that a customer stated a valid claim under TILA based on a disclosure that failed to reflect the terms of the underlying credit agreement. After accepting an offer to transfer a balance to her Capital One credit card at a fixed APR of 10.9 percent, the plaintiff received a “Notice of Change in Terms” two years later indicating the corresponding APR would be increased to 14.99 percent. Despite rescinding the attempted rate change and establishing that the notice was mailed in error, Capital One was found to have violated TILA.
The Credit CARD Act, signed into law on May 22, 2009, creates additional burdens for credit card companies and opens the door for increased consumer actions for potential violations of TILA. Most notably, the act amends TILA to add significantly higher penalties than exist under the current law.Likewise, the United States Court of Appeals for the 3rd Circuit in 2003 reversed a district court decision granting summary judgment to Fleet Bank (R.I.), holding that a question of fact existed as to whether the bank clearly and conspicuously disclosed its right to change the customer’s APR. In that case, Fleet Bank’s credit-card solicitation materials stated that the 7.99 percent introductory “fixed” APR could change in the event of nonpayment or closure of the account. The cardholder agreement also included a provision reserving Fleet Bank’s right to change the terms of the agreement at any time. Nevertheless, the court held that a reasonable consumer could find the language in the solicitation and the agreement to be confusing and misleading and allowed the class action to proceed in federal district court in Pennsylvania.
Other cases have been settled out of court for millions of dollars, presumably to avoid paying significant attorney fees in order to litigate them. In November 2001, Providian agreed to $105 million in restitution and “in-kind” payments to up to three million customers who were charged late fees, higher interest rates on balance transfers, and fees for add-on products such as credit and health insurance and credit-line increases. The settlement amount included attorney fees and litigation costs. In September 2000, the U.S. District Court for the District of Delaware approved the settlement of a class-action lawsuit against MBNA Corp. involving allegations that the credit-card bank failed to disclose limitations on its balance-transfer and cash-advance promotions. Also in July 2000, Citibank settled class-action litigation alleging the improper crediting of credit-card payments and imposition of late charges. And in July 1999, Sears Roebuck & Co. settled a class-action lawsuit challenging interest rate increases applied to its credit-card customers.
New Requirements — Stiffer Penalties
The Credit CARD Act, signed into law on May 22, 2009, creates additional burdens for credit card companies and opens the door for increased consumer actions for potential violations of TILA. Most notably, the act amends TILA to add significantly higher penalties than exist under the current law. The $100–$1,000 penalty range is now $500–$5,000 for individual actions relating to open-end consumer credit plans. The new provisions also give courts the discretion to award higher amounts where compliance failures are found to be an established pattern or practice. The increased penalties and most of the added disclosure requirements described below take effect this month.
Notice of Rate Changes. Among the many changes to TILA, the Credit CARD Act adds a requirement for credit-card issuers to provide notice of an increase in the annual percentage rate or other significant change to an account not later than 45 days prior to the effective date of the change. Each notice required must be made in a clear and conspicuous manner and contain a statement of the right of the cardholder to cancel the account.21 This rule went into effect August 20, 2009.
Interest Rate Changes. The Credit CARD Act prohibits retroactive increases in APRs, fees, and finance charges applicable to outstanding balances, subject to certain exceptions. And creditors may not change the terms governing the repayment of any outstanding account balance. The act further requires that creditors consider factors such as market conditions and the cardholder’s credit risk in determining whether to reduce the APR on an account if it was previously increased based on consideration of the same factors. Accounts on which the APR is increased must be reviewed every six months to assess whether any such factors have changed.
Introductory and Promotional Rates. The TILA amendments provide that no increase in any APR, fee, or finance charge on any credit-card account shall be effective before the end of the one-year period beginning on the date on which the account is opened. Promotional APRs may not be increased until at least six months after the rate takes effect.
Limits on Charges. The Credit CARD Act prohibits double-cycle billing and penalties for on-time payments. Creditors may not assess over-the-limit fees on an open-end credit plan unless the consumer expressly elects to permit such fees. And creditors may no longer impose a separate fee for allowing a customer to make a payment by electronic transfer, telephone authorization, or other means unless the payment involves an expedited service by a service representative of the creditor. The amount of any penalty fee or charge that a card-issuer may impose for any omission with respect to, or violation of, the cardholder agreement must be reasonable and proportional to such omission or violation.
Due Dates and Payments. The new TILA rules require card issuers to apply amounts in excess of the minimum payment amount first to the card balance bearing the highest rate of interest. Billing statements must be mailed to the consumer not later than 21 days before the payment due date, which must be the same day each month. If the payment due date falls on a weekend or holiday, the creditor may not treat a payment received on the next business day as late for any purpose.
Enhanced Consumer Disclosures. Under the revised TILA sections, creditors will be required to include a number of additional disclosures on consumer billing statements such as a written statement explaining that making only the minimum payment will increase the amount of interest paid and the time to repay the outstanding balance.
In addition, creditors must include certain repayment information on statements, including: 1) the number of months it would take to pay the entire outstanding balance if the consumer pays only the required minimum monthly and no further advances are made; 2) the total cost to the consumer, including interest and principal payments, of paying the outstanding balance in full, if the consumer pays only the required minimum monthly and no further advances are made; and 3) the monthly payment amount that would be required for the consumer to eliminate the outstanding balance in 36 months and the total cost to the consumer for doing so if no further advances are made.
Creditors must also disclose the payment due date or, if different, the date on which a late payment fee will be charged, in a conspicuous location on the billing statement together with the amount of the fee or charge to be imposed if payment is made after that date. If one or more late payments on an account may result in an increase in the applicable APR, that fact must also be conspicuously noted, together with the applicable penalty APR, in close proximity to the disclosure of the date on which payment is due under the terms of the account.
Other Provisions. The act further amends TILA to require internet posting of credit-card agreements and prohibit the issuance of credit cards to consumers under age 21 unless the consumer has submitted a written application to the card issuer that includes the signature of a cosignor and submission of certain financial information. Creditors who violate these provisions are subject to the same civil liability mentioned above.
Many claims under TILA have been subject to mandatory arbitration clauses inserted in cardholder agreements, an industry practice that became commonplace over the past 20 years. But recent decisions by two leading arbitration organizations, pressure from state attorneys general and members of Congress, and significant court rulings may signal the end of mandatory binding arbitration in credit-card disputes.
To resolve a lawsuit brought by Minnesota Attorney General Lori Swanson, the National Arbitration Forum signed a consent judgment on July 17, 2009, under which the company is barred from arbitrating credit-card disputes and must stop accepting any new consumer arbitrations. The following week, Attorney General Swanson testified before the Subcommittee on Domestic Policy of the House Committee on Government Oversight and Reform and “strongly encouraged” Congress “to protect consumers from the placement of mandatory arbitration clauses in consumer contracts[,]” including credit-card agreements. According to the subcommittee chairman, Rep. Dennis Kucinich, there are already “a number of bills in Congress that would impose limits on the applicability of mandatory, pre-dispute arbitration agreements” and a bill to establish a new consumer-protection agency which would have the power to limit or ban such agreements. On July 27, 2009, the American Arbitration Association announced the imposition of its own moratorium on consumer-debt-collection cases including those involving a credit-card bill.
Courts are also reconsidering the enforceability of arbitration clauses. The 2nd Circuit Court of Appeals recently overturned a federal district court decision and allowed a class-action suit to proceed against Bank of America. The plaintiff cardholders alleged that the banks, along with other co-conspirators, including American Express and Wells Fargo, illegally colluded to force them to accept mandatory arbitration clauses in their cardholder agreements. In remanding the case back to the district court for further proceedings, the court of appeals held that “[t]he injuries alleged by the cardholders are present, ongoing harms that continue to affect the credit market as long as consumer choice and the quality of credit services offered are artificially suppressed.”
One possible result of these developments is that arbitration will be an option available to cardholders only if they explicitly choose it, and creditors will likely be required to clearly disclose that it is not mandatory and that a lawsuit may be filed by the consumer. At the very least, it seems clear that arbitration will no longer be required in these cases, and creditors should be prepared to defend against claimed TILA violations in the courts.
What remains to be seen is the effect the new Credit CARD Act and the demise of mandatory arbitration will have on cardholder litigation. Federal courts have heard consumer claims and construed the TILA provisions liberally in order to enforce compliance with the statute. Certainly the additional disclosure requirements and restrictions on interest and fees will provide fertile ground for cardholders to bring claims against creditors. Lawsuits will continue to take the form of class actions, with perhaps greater emphasis on proving an established pattern or practice so that a judge can award higher damages under the new civil liability provisions.
In any scenario, the litigation costs of defending against these claims will only increase, and settlement amounts will rise accordingly. Extensive discovery will be necessary to comply with plaintiff requests for documents and records, billing statements, card solicitations, and other materials, likely spanning over several years and encompassing multiple card programs.
Defending Against Cardholder Suits
Credit card companies can take a number of viable positions when defending against TILA-violation claims. At the outset, creditors can challenge class certification based on the diversity of the plaintiffs bringing suit. However, this is typically unsuccessful where the claims are based on solicitations and other mailings sent to a large number of potential customers. If a class action is allowed to proceed, companies can defend on the grounds that any violation was unintentional or the result of a bona fide error. However, this must be supported by evidence that the creditor has in place procedures reasonably adapted to prevent such errors. Creditors must prove the existence of such procedures by a preponderance of evidence. Examples include clerical errors, miscalculations, computer malfunctions, and printing errors.
Creditors may also avoid civil liability where cardholders assert their claims beyond the applicable statute of limitations, which was not changed by the Credit CARD Act. Any action must be brought within one year from the date of the occurrence of the violation. Courts have interpreted this to mean that the one-year limitations period begins to run as of the date on which the underlying transaction was consummated.
The Credit CARD Act also provides several exceptions to the rules described above. These may be relied upon by creditors in defending against consumer claims that the provisions were violated. Specifically with regard to rate increases, TILA allows creditors to increase an APR upon the expiration of a specified period of time, provided that 1) the creditor clearly and conspicuously discloses the length of the period and the new applicable APR; 2) the increased APR does not exceed the disclosed rate; and 3) the increased APR is not applied to transactions that occurred prior to commencement of the period.
Also permitted are increases in variable APRs in accordance with a credit-card agreement that provides for changes in the rate according to operation of an index that is not under the control of the creditor and is available to the general public. Increases due to the completion of a workout or temporary hardship arrangement by the cardholder or the failure of the cardholder to comply with the terms of such an arrangement may also be instituted without incurring civil liability for violation the statute. Certain limits and disclosure rules apply in these situations.
While cardholder disputes are not a new phenomenon, credit-card issuers should be aware of the significant changes in this area of the law, specifically the recent amendments to the Truth in Lending Act and the proposed legislation regarding mandatory arbitration clauses. These developments may lead to increased litigation in the courtroom defending against class actions and individual claims of statutory violations. Judges are likely to view such claims favorably in light of the renewed emphasis on consumer protection.