Consumer Compliance Outlook
On the Docket: Recent Federal Court Opinions
REGULATION Z - TRUTH IN LENDING ACT (TILA)
Court rules on “clear and conspicuous” standard for credit card solicitation disclosures. Rubio v. Capital One Bank , 613 F.3d 1195 (9th Cir. 2010) . The Ninth Circuit held that a credit card issuer violated TILA’s “clear and conspicuous” requirement because its solicitation for a credit card with a “fixed rate of 6.99 percent” did not conspicuously disclose when the annual percentage rate (APR) could change. The plaintiff received a credit card solicitation from Capital One that disclosed in the Schumer Box (a tabular format required by TILA for certain disclosures) a “fixed rate of 6.99 percent” for purchases and balance transfers and named three conditions under which a rate increase could occur. The APR was later increased to 15.9 percent even though none of the triggering conditions occurred. The solicitation disclosed outside the Schumer Box, under the heading “Terms of Offer,” the right to change the agreement’s terms, including the periodic rates. The plaintiff’s class-action lawsuit alleged violations of TILA and state law. The court concluded that describing an APR as “fixed” was not clear and conspicuous when the APR could be changed for any reason and when the disclosure implied it could be increased only in three circumstances. The court noted that a disclosure cannot be clear and conspicuous if reasonable consumers can interpret an ambiguous disclosure in more than one way. Capital One argued that the term “fixed” meant the rate was nonvariable, not that it could not change. The court rejected this argument, citing the Federal Reserve’s consumer testing of credit card disclosures, which found that consumers understood “fixed” to mean a rate that could not change. The court reversed the trial court’s dismissal of the case and remanded it for further proceedings. Recent amendments to Regulation Z restrict a creditor’s ability to refer to an APR as “fixed” in credit card disclosures and advertisements for open-end credit plans. See §226.5(a)(2)(iii) and §226.16(f).
Court rules on cardholder’s liability for unauthorized card use. Azur v. Chase Bank, USA, N.A. , 601 F.3d 212 (3d Cir. 2010). The Third Circuit held that §1643 of TILA, which limits a cardholder’s liability for unauthorized use of a credit card, does not provide the cardholder with the right to be reimbursed for payments already made for unauthorized transactions. The plaintiff hired a personal assistant to assist in managing his credit card with Chase. The assistant used the card to make daily unauthorized cash advances for seven years totaling over $1 million. The unauthorized charges appeared on at least 65 monthly billing statements and occasionally triggered Chase’s fraud alerts. After discovering the assistant’s fraud, the plaintiff sought reimbursement from Chase for the payments he made to the extent that they included unauthorized transactions and removal of adverse credit reports filed by Chase. The Third Circuit affirmed the district court’s dismissal of the case, finding that the language in §1643 limits a cardholder’s legal liability for unauthorized transactions but does not provide a right to be reimbursed once payment is made for those transactions. Additionally, the Third Circuit found that the plaintiff had vested the assistant with the apparent authority to use the card by allowing the continuous payment of fraudulent transactions over a period of time, thus barring the plaintiff’s claims under §§1643 and 1666 of the TILA.
Fair Credit Billing Act (FCBA) does not apply to nonobligor cardholder. Edwards v. Wells Fargo and Co. , 606 F.3d 555 (9th Cir. 2010). The Ninth Circuit held that a credit card issuer is not obligated to respond to billing disputes filed by a nonobligor authorized card user because the protections of the FCBA apply only to the obligors. Wells Fargo issued a credit card to two brothers who were the obligors for charges on the account. They later added the plaintiff to the account as a nonobligor authorized user. The plaintiff disputed several merchants’ charges on the card with Wells Fargo, but Wells Fargo did not respond because the plaintiff was not an obligor on the account. The plaintiff sued Wells Fargo for failing to investigate and resolve the disputes. The court noted that the FCBA imposes a duty on creditors to respond to billing disputes filed by an obligor on an account and that §226.13 of Regulation Z imposes a duty to investigate disputes filed by a “consumer,” which the regulation defines as a “cardholder or natural person to whom consumer credit is offered or extended.” The court found that the plaintiff was neither an obligor under the FCBA nor a consumer under §226.13 and therefore affirmed the dismissal of the case.
Court rejects rescission request because of technical errors in TILA disclosures. Larrabee v. Bank of America, N.A. , 2010 WL 2089260 (E.D.Va. 2010). A federal district court rejected a rescission request for a refinanced mortgage because of errors in the rescission notice and disclosure statement. The plaintiff argued that the lender provided an incorrect rescission notice because it was labeled “Different Lender” when the same lender refinanced the loan. The borrower relied on Handy v. Anchor Mort. Corp., 464 F.3d 760 (7th Cir. 2006) to argue that the right of rescission is extended to three years if a creditor uses the wrong rescission notice form. The court determined that the borrower received the appropriate rescission notice because the loan was with a new creditor. But even if the lender had provided the incorrect form, the court was persuaded by the First Circuit’s decision in Santos-Rodriquez v. Doral Mortgage Corp., 485 F.3d 12, 16 (1st Cir. 2007), which held that the use of the wrong rescission form does not trigger rescission if the notice used clearly and conspicuously apprises a borrower of the right to rescind. The court found that the borrower’s notice satisfied this standard and rejected this claim. The borrower also argued that under Hamm v. Ameriquest Mortgage Co., 506 F.3d 525 (7th Cir. 2007), the rescission period was extended to three years because the disclosure statement failed to state that payments were due in monthly intervals. Comment 226.18(g)-4 of the Regulation Z Official Staff Commentary requires creditors to specify the payment interval (such as monthly) in the disclosure statement. The court evaluated the adequacy of the creditor’s disclosure statement under an objectively reasonable standard and determined that the plaintiff’s interpretation that nearly all of the loan’s 360 payments were due 45 days after loan closing because the monthly interval was not disclosed was “objectively unreasonable” and dismissed this claim.
FAIR CREDIT REPORTING ACT (FCRA)
First Circuit affirms dismissal of lawsuit against furnishers of credit information. Chiang v. Verizon New England Inc. , 595 F.3d 26 (1st Cir. 2010). The plaintiff had billing disputes with Verizon, his telecommunications company, and stopped paying his bills. Verizon referred the debt to a collection agency and notified the consumer reporting agencies (CRAs). The plaintiff disputed the debt with the CRAs, which contacted Verizon to verify the debt. The plaintiff’s lawsuit alleged that Verizon failed to conduct an adequate investigation of the information it furnished after it received a dispute notice from the CRAs. Section 1681s-2(b)(1) of the FCRA requires furnishers to properly investigate a consumer’s dispute filed with the CRAs about the accuracy of information provided by the furnisher to the CRAs. The court first held that the FCRA allows a private right of action against a furnisher for violating its investigation duties under §1681s-2(b)(1). For such a claim to succeed, the court imposed two requirements: 1) the plaintiff must establish that the furnisher acted unreasonably in its investigation of disputed information, i.e., that it failed to correct incomplete or inaccurate factual information; and 2) that a reasonable investigation would have uncovered inaccurate information. The court held that the plaintiff failed to submit any evidence establishing that Verizon’s investigation was unreasonable and failed to prove that if Verizon had conducted a reasonable investigation, it would have discovered factual inaccuracies. The First Circuit therefore affirmed the lower court’s dismissal of the case.