Assignment:
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. The Barrers received and accepted the Cardmember Agreement ("the Agreement") governing their relationship at the relevant time in late 2004. In February 2005, Chase mailed to the Barrers a Change in Terms Notice ("the Notice"), which purported to amend the terms of the Agreement, in particular to increase the Annual Percentage Rate ("APR") significantly. It also allowed the Barrers to reject the amendments in writing by a certain date. They did not do so, and continued to use the credit card. Within two months, the new, higher, APR became effective. According to the Barrers' First Amended 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 by the due date; a credit card balance in excess of the credit limit on the account; failure to pay another creditor when required; the return, unpaid, of a payment to Chase by the customer's bank; or, should Chase close the account, the consumer's failure to pay the outstanding balance at the time Chase has appointed. 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. 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"), and Regulation Z. The Barrers claim to 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." Though the Barrers do not claim that the practice itself is illegal, they do claim that it was illegal for Chase not to disclose it fully to them or to the other members of the putative class. [The federal district court dismissed the Barrers' cause of action. The Barrers appealed.]
II 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." Rather than substantively regulate the terms creditors can offer or include in their financial products, the Act primarily requires disclosure.
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. Specifically, creditors must disclose "the conditions under which a finance charge may be imposed," "the method of determining the amount of the finance charge," and, "where one or more periodic rates may be used to compute the finance charge, each such rate and the corresponding nominal annual percentage rate." Regulation Z, 12 C.F.R. Section 226, provides the precise regulations that the Barrers claim Chase violated.
In general, these regulations establish two conditions a creditor must meet. "First, it must have disclosed all of the information required by the statute." That is, disclosures must be complete. "And second, [they] must have been true-i.e., accurate representation[s] of the legal obligations of the parties at [the] time [the agreement was made]." Section 226.6 lists the initial disclosures required of a creditor under a new credit agreement. The list includes "each periodic rate that may be used to compute the finance charge and the corresponding annual percentage rate." 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. Therefore the failure to disclose the reason for the change to the Barrers' APR-adverse credit information-and that Chase would look up their credit history to acquire that information does not undermine the adequacy of Chase's disclosure. Even so, such disclosure must be clear and conspicuous. Neither the Act nor Regulation Z define clarity and conspicuousness in this context. The Staff Commentary explains only that "the clear and conspicuous standard requires that disclosures be in a reasonably understandable form."
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. The change-in-terms provision appears on page 10-11 of the Agreement, five dense pages after the disclosure of the APR. It is neither referenced in nor clearly related to the "Finance Terms" section. This provision, as part of the APRs allowed under the contract, is 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. 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. REVERSED and REMANDED
Questions
1. a. How did Chase violate Regulation Z and the TILA?
b. According to this decision, what is a "clear and conspicuous" disclosure?
2. Green Tree Financial financed Randolph's mobile home purchase. Randolph sued, claiming that Green Tree's financing document contained an arbitration clause that violated TILA because it did not provide the same level of protection as TILA accords. If the arbitration clause provided lesser protection than that provided for by TILA, as Randolph claimed, should the arbitration go forward? Explain. See Randolph v. Green Tree Financial Corp., 531 U.S. 79 (2000).
3. Sarah Hamm sued Ameriquest Mortgage Company claiming a violation of the Truth in Lending Act (TILA). Hamm borrowed money secured by a 30-year mortgage from Ameriquest. She signed a "Disclosure Statement" specifying, among other things, that she was responsible for 359 payments at a specified amount and one payment for the last month of a slightly smaller amount. The Statement did not, however, explicitly specify, as required by the TILA, the total payments due (360). Was the TILA violated? Explain. See Hamm v. Ameriquest Mortgage, 506 F.3d 525 (7th Cir. 2007).