Developments In Credit Card Litigation
By Robert S. Green(1)
Credit card issuers mailed a record 3.54 billion solicitations in 2000. The response rate was a low 0.6%.(2) Credit card issuers seeking to increase the response rate for their solicitations among this glut of credit card offers must be careful to avoid solicitations which could be attacked as deceptive or misleading. Recent challenges by regulators and consumers have determined that technical disclosures in fine print are not enough. If the overall impression created by solicitation is arguably deceptive, the result is likely to be litigation or unwanted attention from regulatory authorities. This article discusses a sampling of recent actions, settlements and rulings regarding credit card litigation.
OCC ENFORCEMENT ACTIONS
In the last year, the Office of the Comptroller of the Currency (OCC) conducted enforcement actions resulting in consent orders with Providian National Bank and Direct Merchants Credit Card Bank, N.A. The Providian Consent Decree resulted in restitution payments of over $330 million, along with substantial limitations on future practices.(3) The Direct Merchants action resulted in restitution approximating $3 million, as well as significant limitations on future practices.(4) The OCC action against Providian addressed several aspects of Providian's practices. These included its practice of offering a so-called "guaranteed savings rate" on balance transfers, selling certain add-on products without full and fair disclosure including credit protection, and other fee-based products referred to as Credit Connections Plus, Drive Pro, Drivers Protection Plan, Price Pro and Providian Health Advantage. The OCC action against Providian also addressed late fee issues, performance based pricing, a product called "real check" and case advance checks, among other things.
The OCC recovery from Direct Merchants is not as large as from Providian, but the consent decree is still significant in the manner in which it addressed the marketing practices of Direct Merchants bank. The consent order requires the bank to cease certain practices in the marketing of the bank's credit cards and to pay approximately $3.2 million in restitution to 62,000 consumers. These practices involved the bank's conduct of "downselling" consumers by prominently marketing to consumers one package of credit card terms, but then approving those consumers only for accounts with less favorable terms, and touting the approved account in a fashion designed to mislead the customer about the fact he or she had been "downsold." The OCC concluded that the bank's conduct constituted unfair and deceptive practices in violation of the Federal Trade Commission Act, and was unsafe and unsound within the meaning of the Federal Deposit Insurance Act. The OCC also concluded that the Bank violated the Truth in Lending Act (TILA) and Regulation A by failing to disclose certain application or processing fees as "finance charges," and by failing to disclose in a table the rate, fee, and cost information for any account for which the consumer may be approved.
"OPTIONAL" CREDIT INSURANCE DISCLOSURE DEEMED INADEQUATE
According to a ruling in federal court in Florida, Chase Manhattan Bank violated the Truth in Lending Act by failing to properly disclose bundled credit insurance products.(5) Chase Manhattan marketed a credit card with Wal-Mart stores. The application included a package of credit insurance called "LifePlus." The package consisted of life, disability, involuntary unemployment and leave of absence insurance coverages. The application included a place for the applicant's initials and disclosed that "LifePlus is optional." The Court analyzed the plaintiff's claims under Sections 1601(a) and 1605(b) of the Truth in Lending Act ("TILA"). Section 1605(b) provides: "Charges or premiums for credit life, accident, or health insurance written in connection with any consumer credit transaction shall be included in the finance charge unless (1) the coverage of the debtor by the insurance is not a factor and the approval of the credit of the extension of credit, in this fact is clearly disclosed in writing to the person for applying or obtaining the extension of credit; and (2) in order to obtain the insurance in connection with the extension of credit, the person to whom the credit is extended must give specific affirmative written indication of his desire to do so afer written disclosure to him of the cost thereof."
The Court rejected the plaintiff's argument that the statute required the solicitation to include the same words used in the statute by stating that the applicant's decision on whether or not to opt for the package of credit insurance "is not a factor" in the bank's decision on whether to issue the card. In rejecting plaintiff's argument, the Court stated that, the plaintiff "has not articulated any reason why Section 1605(b)(1), unlike all the other disclosure provisions of TILA, was intended as other than a guideline, the practical implication of which Congress deliberately elected to leave to the Federal Reserve Board."(6)
However, the Court found that the term "optional" when used to describe the insurance packages, without more, was susceptible to two equally reasonable interpretations. "This lack of clarity . . . is inconsistent with the meaningful disclosure requirement of TILA Section 1601(a) and 1605(b) because a consumer who believes that Chase's decision to issue him a Mastercard may be influenced by the fact that he agreed to enroll in LifePlus has not made a truly voluntary decision to participate in the LifePlus program."(7)
The District Court concluded that Chase's disclosure was not meaningful because it failed to convey Chase would not consider the consumer's decision whether to enroll in its credit approval process in issuing a card. The Court held Chase violated TILA by failing to include and disclose the cost of the credit insurance as part of the finance charge. The Court granted plaintiff summary judgment on his TILA claim.
CHALLENGES TO OTHER FEE-BASED PRODUCTS
In the Providian Bank Credit Card cases, the OCC and the class action plaintiffs challenged Providian's "Credit Protection" product, which is sold not as insurance but as a deferred payment program. The OCC and class plaintiffs also challenged Providian's sale of other fee-based products. The allegations in the class actions asserted that Providian sold its fee-based products without providing full disclosure of the terms, conditions and limitations. The class plaintiffs also asserted that the products were initially sham or worthless products. No decision on the merits of the class plaintiff's claims was rendered by court. The San Francisco Superior Court held two preliminary hearings on class certification and scheduled a final hearing for the Spring of 2001. In December 2000, the parties reached a settlement which provided for Providian to pay $105 million in cash refunds, credits and additional benefits to the effected cardholders (in addition to the restitution discussed above in connection with the OCC settlement), in exchange of release of class action claims. The Superior Court granted preliminary approval of the settlement and scheduled a final hearing for the Fall of 2001.
In February and March, multiple class action complaints were filed against Capital One Bank and Capital One and its parent, Capital One Financial Corporation in Federal Court in California.(8) The claims against Capital One assert improper disclosure of the fees and finance charges related to its fee-based products. Capital One's fee-based products include the following:
The plaintiffs in the Capital One litigation assert, among other things, that Capital One's payment protection and account balance coverage are actually guarantees or insurance that protect Capital One and therefore must be included in the calculation of the finance charge and as part of the historical annual percentage rate. Additionally, the plaintiffs assert that the products sold by Capital One are essentially worthless or, in any event, the material limitations on the products are not fully disclosed to cardholders at the time of the initial sale.
Similar allegations are pending against Direct Merchants Credit Card Bank in actions filed in state court in Minnesota and federal Court in Arizona in connection with Direct Merchant's fee-based products.
RECENT DECISIONS AND ACTIONS REGARDING PROMOTIONAL RATES
Broder v. MBNA, New York Law Journals (N.Y. Co. March 2, 2000). Plaintiff alleged that he received a solicitation from MBNA offering a 6.9% APR on cash advances for a six month period. Plaintiff alleged that MBNA breached the agreement to provide a special low APR on cash advances for the stated period by using a payment allocation method that failed to provide the low APR that had been promised.
Plaintiffs' cash advances subject to the promotional 6.9% APR were reduced by the amount of his monthly payments while his purchase balances remained wholly unpaid and continued to accrue finance charges at a much higher APR of 17.9%.
MBNA relied on the provision in the Cardholder Agreement stating that the payments "will be allocated in a manner we determine" and the statements in the solicitation materials that MBNA may allocate payments first to the cash advance balance and then to the purchase balance.
Even though the court found that "MBNA did not breach the literal terms of the agreement" with the plaintiff, nevertheless the use of ambiguous language and small print led the court to deny MBNA's motion for summary judgment on the claim of a breach of the implied covenant of good faith.(9) For the same reasons, the court denied summary judgment on the claims arising under Sections 349 and 350 of the N.Y. General Business Law, relating to deceptive acts and practices and false advertising. The court found that "the complaint adequately alleges conduct that is consumer-oriented and which has a broad impact on consumers at large."(10) In addition, the court granted class certification.
DeMando v. Morris, 206 F.3d 1300 (9th Cir. 2000). Plaintiff received a solicitation letter from Capital One Bank in June 1995 that stated: "Receive a 10.9% Lifetime APR!" and "Simply Transfer $250 or more to your Capital One card and receive a low fixed APR of 10.9% for life!" In August 1997, Capital One mailed to plaintiff a Notice of Change in terms informing her that her APR would be increased to 14.99% effective October, 1997. Plaintiff filed a complaint alleging violations of TILA, the California Consumer Legal Remedies Act, breach of contract, unfair competition, fraud and negligent misrepresentation. On the very next day, Capital One sent a letter to plaintiff to inform her that it was voluntarily rescinding the proposed increase in her APR.
The Ninth Circuit held that the trial court erred in granting summary judgment for Capital One on plaintiffs' claims that the August 1997 Notice of Change of Terms violated TILA. The court found that "because the Notice contained terms that were in violation of the credit agreement, the Notice violated Regulation Z."(11) In particular, the Court of Appeals found that the Notice violated the provision in Regulation Z requiring that all disclosures issued in connection with open-ended credit arrangements, shall reflect the terms of the legal obligation of the parties.(12) Even though the proposed Change in Terms had not been implemented, and therefore plaintiff had not suffered any actual damages, nevertheless plaintiff "has suffered the loss of a statutory right to disclosure" and therefore could pursue a claim for statutory damages under TILA.(13) However, the court affirmed the entry of summary judgment for Capital One on all the other claims in the Complaint.
Chavers v. Fleet Bank. Plaintiffs have brought class actions against Fleet in state court in Rhode Island and federal court in Philadelphia. The gravamen of these complaints is that Fleet induced consumers to become cardmembers by mailing them solicitations which promised either no annual fee or low APR's, but then imposed an annual fee or raised the APR after the accounts were opened. The actions claim violations of TILA, state consumer protection statutes, breach of contract, and unjust enrichment. The federal actions were dismissed on the ground that TILA was not violated because the statements in the solicitation were literally true. The state court actions are proceeding before the newly created Business Court in Providence, Rhode Island.
OTHER SIGNIFICANT SETTLEMENTS
Providian Financial Corp. Class actions filed in California state court and federal court in Pennsylvania had alleged numerous instances of improper marketing practices and imposition of unwarranted fees on consumers' credit card accounts. The alleged practices included the imposition of charges for "add on" products that consumers had not requested or had been misled into purchasing; failure to make timely posting of customer payments, resulting in the imposition of late fees and increases in APR's; failure to provide credit line increases in accordance with the terms of the cardholder agreement.
In June 2000, Providian agreed to pay $305 million pursuant to a settlement reached with the Office of the Comptroller of the Currency, the California Attorney General and the San Francisco District Attorney's Office.
The settlement was significant not only because of the size of he monetary penalty, but also because it represented "the first time a bank regulatory agency used the Federal Trade Commission Act to bring an action for unfair and deceptive business practices."(14)
The settlement with the government regulators did not release the claims of the members of the California and federal class actions. In December 2000, Providian entered into a settlement of the class actions for $105 in cash and credits.
First USA. In a class action filed in federal court in East St. Louis, Ill., plaintiffs alleged that First USA improperly assessed late fees to customers who had paid on time, in violation of TILA, the cardholder agreement and state laws. In November 2000, a settlement was entered into for approximately $40 million.
Citibank. Plaintiffs brought a class action alleging credit card customers had been forced to pay late fees and extra interest even in instances where monthly payments had arrived on time. In August 2000, Citibank agreed to pay $45 million to settle the case.
Chase Manhattan Corp. Plaintiffs brought a class action alleging late posting of customer payments, resulting in unjustified late fees and increased finance charges. In September 2000, Chase agreed to a settlement of approximately $22.2 million.
1. Robert S. Green is a principal in the San Francisco, California firm of Green Welling LLP.
2. Wallstreet Journal, March 19, 2001
3. OCC Consent Order, In re Matter of Providian Bank, Tilton, New Hampshire, June 28, 2000; Providian Credit Card Cases, Judicial Council Coordinated Proceeding No. 4085 Super. Ct. of San Francisco, CA
4. OCC Consent Order, In the Matter of Direct Merchants Credit Card Bank, N.A., Scottsdale, Arizona, May 3, 2001
5. London, et al. v. Chase Manhattan Bank, et al., No. 99-1298-Civ., S.D. Fla. March 20, 2001
8. Martin et al. v. Capital One Bank, Case No. C01-0079-PJH; Gendel v. Capital One Bank, et al., Case No. C01-0079-PJW, N.D. CA
9. Broder v. MBNA, New York Law Journals (N.Y. Co. March 2, 2000)
11. 206 F.3d at 1301
12. 12 C.F.R. §226.5(c)
13. Id. at 1303
14. American Banker, June 29, 1000, "Providian's $300M Pact with Regulators is One for the Books."