Alert March 24, 2009

Seventh Circuit Rules Separate Notice Not Needed For Pre-Authorized Rate Increase

The Seventh Circuit affirmed the dismissal of a class action alleging that a bank violated Regulation Z by applying an interest rate change to the billing cycle in which the change occurred. Under plaintiff’s contract, if she exceeded her credit limit at the end of two months in any rolling 12-month period, the bank could increase her interest rate. The bank later amended the terms to provide that the “penalty interest rate” would take effect at the beginning of the billing cycle to which it applied. Plaintiff agreed to these terms by continuing to use her credit card. When plaintiff exceeded her credit limit at the close of the billing cycles in August, November, and December 2007, the bank raised her interest rate effective at the start of the November-December billing cycle. Plaintiff argued that this violated Regulation Z’s 15-day notice provision as to changes to terms that require disclosure. Finding the regulation ambiguous and the contract clear, the Court rejected plaintiff’s argument and joined other federal courts in ruling that “banks may apply higher, penalty rates of interest to the entire billing cycle in which the consumer’s default occurs.” The Court noted, however, that effective July 1, 2010, the regulation will be amended to prevent retroactive changes and require a 45-day notice of higher interest rates, which would override any contractual language to the contrary. Click here for Swanson v. Bank of America, N.A., No. 08-3322 (7th Cir. Mar. 19, 2009).