A Bank Can Raise Interest Rates On A Credit Account Without Notice, At The Beginning Of A Cycle, If The Original Agreement Allows It
SWANSON v. BANK OF AMERICA (March 19, 2009)
Bank of America issued a credit card to Laura Swanson. Pursuant to the credit agreement, Bank of America could increase the interest rate if her balance exceeded her credit limit twice in any 12-month period. The higher interest rate was to take effect at the beginning of the billing cycle to which it applied. Swanson exceeded her credit limit at the close of the August 2007 and November 2007 cycles. Bank of America applied the higher interest rate effective at the beginning of the November cycle. Swanson brought suit, alleging that a Truth in Lending Act regulation precludes the imposition of a higher interest rate in that circumstance. The district court granted judgment to the bank. Swanson appeals.
In their opinion, Chief Judge Easterbrook and Judges Kanne and Evans affirmed. The Court first analyzed the regulation at issue. Although both the bank and Swanson argued that the regulations supported its position, the Court concluded that the regulation did not squarely address the issue at hand. It therefore consulted the commentary. The bank relies on the comment that states that no notice of the change is required if the specific change is set forth in the initial agreement. The comment gives as examples an increased rate after a lower introductory rate and an increased rate when a customer fails to keep a promised minimum account balance. Swanson, on the other hand, relies on the comment that notice must be given if the contract allows the creditor to increase the rate at its discretion. The Court noted that one appellate court and at least six trial courts had considered the issue and had all agreed with the bank's position. Finding these decisions "sensible," the Court also agreed with the bank. It pointed out that the contract between the bank and Swanson allowed the practice. An ambiguous regulation with an ambiguous commentary was not enough to override the specific contract term. Finally, the Court observed that the Federal Reserve had promulgated a new regulation that would prohibit the vary practice at issue. The new regulation is not effective until July of 2010 -- Swanson must live with the law as it stands today.
