Laura Swanson v. Bank of America, N.A. ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-3322
L AURA M. S WANSON, individually
and on behalf of a class,
Plaintiff-Appellant,
v.
B ANK OF A MERICA, N.A., and
FIA C ARD S ERVICES, N.A.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 08 C 184—Amy J. St. Eve, Judge.
A RGUED F EBRUARY 23, 2009—D ECIDED M ARCH 19, 2009
Before E ASTERBROOK, Chief Judge, and K ANNE and
E VANS, Circuit Judges.
E ASTERBROOK, Chief Judge. When Bank of America
extended credit to Laura Swanson, it told her that, if
excessive purchases caused her balance to exceed the
$5,000 credit limit at the end of two months in any
rolling 12-month period, it could increase her interest
rate from 18% to 32% per annum. Later the Bank sent
2 No. 08-3322
Swanson a notice amending the terms to provide that the
higher, penalty interest rate would take effect at the
beginning of the billing cycle to which it applied. Swanson
agreed to these terms by continuing to use her credit card.
Swanson’s account was over 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. That
cost Swanson approximately $60 more than it would if the
Bank had notified her in December of its decision to
raise the rate, and then had applied the increase at the
start of the December 2007 to January 2008 billing cycle.
Swanson contends in this suit that a regulation issued
by the Federal Reserve under the Truth in Lending Act
forbids rate changes that apply to the entire billing cycle
in which the change occurs. She seeks a refund of the
$60 plus statutory penalties. Swanson concedes that her
contract with the Bank allowed it to act exactly as it did,
but she insists that the regulation vitiates her consent. The
district judge, however, held that Swanson’s assent to the
terms is conclusive. 566 F. Supp. 2d 821 (N.D. Ill. 2008).
The regulation on which Swanson relies is 12 C.F.R.
§226.9(c), which provides:
(1) Whenever any term required to be disclosed
under §226.6 is changed or the required minimum
periodic payment is increased, the creditor shall
mail or deliver written notice of the change to
each consumer who may be affected. The notice
shall be mailed or delivered at least 15 days prior
to the effective date of the change. The 15-day
No. 08-3322 3
timing requirement does not apply if the change
has been agreed to by the consumer, or if a peri-
odic rate or other finance charge is increased
because of the consumer’s delinquency or default;
the notice shall be given, however, before the
effective date of the change.
(2) No notice under this section is required when
the change involves late payment charges, charges
for documentary evidence, or over-the-limit
charges; a reduction of any component of a finance
or other charge; suspension of future credit privi-
leges or termination of an account or plan; or when
the change results from an agreement involving
a court proceeding, or from the consumer’s
default or delinquency (other than an increase
in the periodic rate or other finance charge).
The interest rate is a “term required to be disclosed under
§226.6”. Swanson contends that by raising the rate from
18% to 32% the Bank changed a “term” without 15-day
notice. Yet §226.9(c) says that the 15-day notice rule does
not apply “if the change has been agreed to by the con-
sumer”. Swanson agreed that the Bank could increase
her rate if she went over her credit limit, but she insists
that the change can’t go back to the start of the billing
cycle, because that “effective date” precedes the notice.
For its part, the Bank maintains that post-dating the
new rate is an over-the-limit charge covered by subsec-
tion (b)—and it adds that the word “term” in subsection (a)
should be understood to deal exclusively with the rules
set by contract rather than with the periodic interest rate.
4 No. 08-3322
The last sentence of §226.9(c)(1) refers to notice of “a
periodic rate or other finance charge”, not to a change in
a “term.”
As the Bank sees things, if no contractual term has been
changed, the last sentence of §226.9(c)(1) never comes
into play. A retroactive change in the interest rate is no
different from a fee in the over-limit month (here, a fee
of $60), and there is no need to give advance notice
before contractually authorized fees may be assessed. The
Bank gives as another example of its reading the treat-
ment of introductory rates—for example, the contract
specifies 10% interest for six months, rising to 18% in the
seventh. That change does not require a separate notice,
the Bank observes (and Swanson concedes); and if a
planned increase in interest does not call for notice, then
an increase allowed by a combination of contract and over-
limit charges also does not require advance notice, the
Bank wraps up.
We have said enough to show that the regulation does
not squarely address what notice (if any) is required when
the terms of a contract authorize an increase in the rate
of interest. So we are entitled to consult the Board’s
commentary, which is authoritative if within the bounds
of reasonableness. Ford Motor Credit Co. v. Milhollin, 444
U.S. 555 (1980). The Board’s Official Commentary to
§226.9(c) includes this language:
No notice of a change in terms need be given if the
specific change is set forth initially, such as: Rate
increases under a properly disclosed variable-rate
plan, a rate increase that occurs when an em-
No. 08-3322 5
ployee has been under a preferential rate agree-
ment and terminates employment, or an increase
that occurs when the consumer has been under an
agreement to maintain a certain balance in a sav-
ings account in order to keep a particular rate and
the account balance falls below the specified
minimum. In contrast, notice must be given if the
contract allows the creditor to increase the rate at
its discretion but does not include specific terms
for an increase (for example, when an increase may
occur under the creditor’s contract reservation
right to increase the periodic rate) . . . .
12 C.F.R. Part 226, Supp. 1, §226.9(c), Comment 1. The first
sentence of this comment shows that lenders need not
give separate notice before applying pre-authorized rate
increases. The comment groups variable interest (of the
sort where the rate rises after six months or a year) with
penalty interest (where, for example, the consumer fails
to maintain a minimum balance). The Bank argues, and the
district court concluded, that this sentence permits the
practice about which Swanson complains. But this has not
led Swanson to give up. She contends that the second
sentence governs because the Bank has discretion not to
raise the rate (and did not do so for Swanson until she
went over limit for a third month). To this the Bank
replies that the lender always has discretion to give a
consumer a break; if as §226.9(c)(2) says it can lower
an interest rate without notice, why can’t it defer ap-
plying a penalty rate without notice? Cf. Wisconsin Electric
Power Co. v. Union Pacific R.R., No. 08-2693 (7th Cir. Mar. 2,
2009), slip op. 6–10 (explaining why courts do not read
6 No. 08-3322
contracts to penalize entities that give a break to their
trading partners).
So far one court of appeals and at least six district courts
have interpreted the ambiguous Comment 1 to the am-
biguous §226.9(c). All have held, as our district court did,
that banks may apply higher, penalty rates of interest to
the entire billing cycle in which the consumer’s default
occurs. Evans v. Chase Bank USA, N.A., 267 Fed. App’x 692
(9th Cir. 2008) (nonprecedential disposition); Shaner v.
Chase Bank, USA, N.A., 570 F. Supp. 2d 195 (D. Mass. 2008);
Williams v. Washington Mutual Bank, 2008 U.S. Dist. L EXIS
5325 (E.D. Cal. Jan. 11, 2008); Augustine v. FIA Card Services,
N.A., 2007 U.S. Dist. L EXIS 66382 (E.D. Cal. Aug. 30, 2007)
(appeal pending); Barrer v. Chase Bank, USA, N.A., 2007
U.S. Dist. L EXIS 26571 (D. Ore. Jan. 23, 2007); McCoy v.
Chase Manhattan Bank USA, 2006 U.S. Dist. L EXIS 97257
(C.D. Cal. Aug. 10, 2006); Penner v. Chase Bank USA, N.A.,
2006 U.S. Dist. L EXIS 53179 (W.D. Wash. Aug. 1, 2006).
These decisions are sensible, and we agree with them.
With the regulation and the comment both ambiguous,
there is no good reason to override the contract between
Swanson and the Bank—a contract that unambiguously
authorizes the Bank to act as it did. Moreover, it would
be lawful for a bank to impose an over-limit fee (say, $75)
in the first month, then increase the periodic rate of inter-
est only for successive months. As the Bank’s actual
practice of back-dating the penalty rate has the same
economic effect as a fee in the initial month, it is hard to
see why one method should be allowed and the other
prohibited. The point of advance-notice requirements is
No. 08-3322 7
to allow customers to shop for better rates. But cus-
tomers are not entitled to avoid fees for completed de-
faults, such as late (or skipped) payments, or over-limit
charges. Structuring penalty interest to have the same
effect as a penalty fee in the initial month therefore does
not undermine the goal of advance-notice require-
ments. Swanson and others in her position still can shop
for better rates for future months.
There is one more reason not to create a conflict: The
Federal Reserve has changed the rules, effective July 1,
2010, to delay the effectiveness of penalty rate increases.
The Board did this by adding a new subsection, §226.9(g),
that prevents retroactive changes and requires 45-day
notice of higher interest rates, expressly overriding
any contractual provisions authorizing swifter changes.
74 Fed. Reg. 5244, 5414–15 (Jan. 29, 2009). It would be
inappropriate to give this new language retroactive
effect by reading §226.9(c) as if the new §226.9(g) had
been there all along. The reason the Federal Reserve
added §226.9(g) was precisely that it recognized that the
existing regulation did not prohibit penalty rates that
begin at the start of the billing cycle in which the con-
sumer’s default occurs. The Federal Register has an
extensive commentary on §226.9(g) in which the agency
recognizes that §226.9(g) will change the way penalty-
default interest rates are applied. See 74 Fed. Reg. at
5350–56. The Supreme Court held in Milhollin that courts
must honor the Board’s commentary on its rules; we
honor it by taking the Board at its word that §226.9(g)
makes a real change—not only from 15 to 45 days of notice,
but also from a start-of-cycle approach to one in which
8 No. 08-3322
the higher rate must be deferred for a billing cycle and
a half.
Swanson effectively wants the benefit of tomorrow’s
regulations, today. But the Federal Reserve set July 1,
2010, as the effective date. The Bank wins under the
law now in force.
Swanson contends that she is entitled to relief under
Illinois law even if not under federal law. The bank with
which she dealt is based in Delaware, however, and
Illinois may not override interest rates, charged by a
national bank, that are lawful under contracts and the rules
of the bank’s home state. 12 U.S.C. §85; Beneficial National
Bank v. Anderson, 539 U.S. 1 (2003); Marquette National
Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S.
299 (1978). Not that Illinois has tried; it treats compliance
with the Truth in Lending Act as a defense to any claim
under state law. See Lanier v. Associates Finance, Inc., 114 Ill.
2d 1, 17, 499 N.E.2d 440, 447 (1986). So the district court
properly granted judgment for the Bank on both state
and federal theories.
A FFIRMED
3-19-09