Oregon couple win credit risk ruling against Chase

PORTLAND — In a legal victory for consumers, a federal appeals court has ruled that Chase Bank must clearly disclose that it can raise the annual percentage rates for cardholders based on credit risk.

The 9th U.S. Circuit Court of Appeals ruled in favor of an Oregon couple who claimed that Chase violated the Truth in Lending Act, reversing a lower court ruling that had dismissed their complaint.

Cheryl and Walter Barrer filed a class-action lawsuit against the bank after it nearly tripled the annual percentage rate — or APR — on their credit card from about 9 percent to more than 24 percent in April 2005.

The couple claimed that Chase violated the act by failing to disclose the criteria it used to raise the rate, including the risk factors involved.

The court noted that Chase cited general reasons that included outstanding loans it deemed "too high" and too many recently opened credit accounts.

The judges, however, sided with Chase on the general principle "that it must be able to adjust the price of credit according to how risky it is to lend to a given cardholder."

The court also said the bank's failure to disclose that adverse credit information was the reason for raising the couple's APR and "that Chase would look up their credit history to acquire that information" was not enough to violate the act.

But the opinion by Judge Diarmuid O'Scannlain said Chase had a duty to "clearly and conspicuously" disclose that it could change interest rates "for any reason at all." Such disclosures, he added, must be made in a way "that a reasonable cardholder would notice and understand."

The 2-1 opinion issued last month said Chase's change-in-terms provision came "five dense pages after the disclosure of the APR" and "is buried too deeply in the fine print."

Judge Susan Graber was even more critical of the bank in a dissenting opinion that concurred with the majority in part.

Graber said allowing the bank to change the rate for any reason so long as it clearly disclosed that it reserved that right could lead to "bizarre and unexpected" results.

She said under the majority reasoning, Chase could change the rate if it had "adequately disclosed it had a pre-existing plan to raise the Barrers' APR to 50 percent if they dye their hair red."

The court noted it took the couple three months to pay off their balance at the higher rate.

President Barack Obama last month signed into law a bill designed to protect debt-ridden consumers from surprise charges. He criticized policies that allowed for confusing fine print; the sudden appearance of unexplained fees on bills; unannounced shifts in payment deadlines, interest charges or rate increases even when payments aren't late; and payments directed to balances with the lowest interest rates rather than the highest.

The new credit card rules, which go into effect in nine months, prohibit companies from giving cards to people under 21 unless they can prove they have the means to pay the debt or a parent or guardian co-signs. A customer also will have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance. Even then, the lender will be required to restore the previous, lower rate if the cardholder pays the minimum balance on time for six months.

And consumers also will have to receive 45 days' notice and an explanation before their interest rates increase.