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Friday February 8, 10:20 pm Eastern Time
3rd Circuit Deals Blow to Banks Over Credit Card Fee Changes
Shannon P. Duffy (The Legal
In a significant defeat for banks, the 3rd U.S. Circuit
Court of Appeals has ruled that credit card holders can sue under the
Truth in Lending Act over an alleged "bait and switch" in which they say they were
promised a card with no annual fee only to learn six months later that a fee was
"Solicitation disclosures are intended to alert the
consumer to the basic costs of the credit card he is considering -- a purpose
unserved where the issuer conceals the temporary nature of a favorable fee or
rate in this manner," 3rd Circuit Judge Anthony J. Scirica wrote in Rossman
v. Fleet Bank.
The ruling reverses a decision by U.S. District Judge
Bruce W. Kauffman, who found that the TILA has a narrow scope and requires only
that banks disclose all the terms that will apply to credit card holders on the
day they receive the card.
In dismissing the suit, Kauffman wrote: "If as
alleged, Fleet lured consumers into opening credit card accounts with relatively
favorable terms while intending to switch those terms shortly thereafter, then
Fleet unquestioningly engaged in wrongdoing. But wrongdoing alone does not
automatically trigger application of the TILA's provisions."
Kauffman found that Fleet's disclosures in the solicitations it sent to
consumers in late 1999 were "accurate with respect to the terms offered at that
time; the fact that Fleet allegedly intended to change those terms in the near
future did not render the disclosures inaccurate for purposes of the
In the appeal, plaintiffs' attorney Michael D. Donovan of Philadelphia,
Pennsylvania-based Donovan Searles argued that the TILA is a consumer protection statute
that should prohibit a bait-and-switch in which a credit card issuer solicits
new customers with a promise of no annual fee despite its secret intention of
imposing a fee within the first year.
Donovan contends that even after
Fleet imposed the annual fee on the lead plaintiff, Paula Rossman, it continued
to mail solicitations that promised a card with no annual fee.
lawyer, Burt M. Rublin of Philadelphia-based Ballard Spahr Andrews &
Ingersoll, argued that the TILA should not be read as a consumer protection
statute, but rather as a disclosure law.
Rublin said Kauffman got it
right because he focused on Fleet's duty to disclose the terms that applied at
the time the card was issued. And the cardholder agreement, he said, clearly
spelled out that Fleet reserved the right to change the terms at any
But Scirica sided with Donovan and found that the TILA was designed
to protect consumers and that it should, therefore, be liberally construed in
the consumer's favor.
"Under the approach urged by Fleet, a credit issuer
would be able to disclose any terms it wanted to, with no intention ultimately
to offer those terms. It could send, together with the card, a new set of
disclosures stating the terms it had always actually intended to provide,"
Scirica wrote in an opinion joined by Judges Samuel A. Alito and Maryanne Trump
"Fleet's approach would have the potential to render the
solicitation disclosure requirements created by the 1988 amendments to the TILA
entirely ineffectual. Misleading early disclosures would serve no informative
purpose. And worse, the additional disclosure requirement mandated by Congress
-- for the purpose of encouraging informed consumer choices -- could be used for
the purpose of deceiving consumers."
In the suit, Rossman claims that she
responded to a Fleet solicitation that pitched a credit card with no annual fee
but that Fleet added a $35 annual fee just six months later.
explanation for the annual fee was that the Federal Reserve Board had raised
interest rates. But the suit alleges that Fleet planned all along to impose a
fee if interest rates rose.
Rossman alleges that despite Fleet's
protestations that it had been effectively forced to cease offering the card
without an annual fee, it continued to solicit other new customers with offers
for no-annual-fee credit cards.
Scirica found that the stated purpose of
the TILA, which took effect in 1969, is "to assure a meaningful disclosure of
credit terms so that the consumer will be able to compare more readily the
various credit terms available to him and avoid the uninformed use of credit,
and to protect the consumer against inaccurate and unfair credit billing and
credit card practices."
The law requires a series of disclosures that
must be made before the consummation of the underlying credit agreement, as well
as at certain other specified times.
"Because the TILA is a remedial
consumer protection statute, we have held it should be construed liberally in
favor of the consumer," Scirica wrote.
In 1988, Scirica said, Congress
decided to strengthen the TILA by passing the Fair Credit and Charge Card
Disclosure Act, which bolstered the law's requirements with respect to credit
Significantly, for the first time, the law imposed disclosure
requirements on credit card applications and solicitations. The TILA now
requires applications and solicitations to disclose the annual percentage rates,
certain fees (including annual fees), the grace period for payments, and the
balance calculation method.
Before the amendments, Scirica said, the TILA
required only that credit card issuers make such disclosures before the opening
of the account -- a requirement that was ordinarily fulfilled by the issuers
providing the disclosures along with the card.
Scirica found that the
disclosures required by the law "are intended to make the terms of the
contractual agreement accessible to the consumer."
As a result, Scirica
said, Fleet's statement that its card had no annual fee was lawful only if it
met two conditions:
"First, it must have disclosed all of the information
required by the statute. And second, it must have been true -- i.e., an accurate
representation of the legal obligations of the parties at that time -- when the
relevant solicitation was mailed."
Rossman's suit contained a three-prong
First, she alleged that the statute requires not only disclosure
of presently imposed annual fees, but also any annual fee that might be imposed
in the future. Second, she argued that whether or not Fleet was required to
disclose future fees, its disclosures failed to meet the requirements of the
TILA because they misleadingly suggested there never would be an annual
Finally, she claimed that Fleet used the disclosures as part of a
bait-and-switch scheme by which it attracted business with the offer of a
no-annual-fee card, even though it intended to charge an annual fee on the card
Donovan argued that Kauffman misinterpreted the TILA by
holding that the law requires disclosure of only the "presently imposed"
Federal regulations, he said, require that banks disclose any fee
"that may be imposed" -- a phrase that Donovan interpreted as requiring
disclosure of all fees that might ever be imposed.
saying, "The Federal Reserve Board's use of the word 'may' does not compel
adoption of plaintiff's interpretation. The phrase 'may impose' means 'is
permitted to impose' in this context, and not, as suggested by plaintiff, 'might
impose.' Thus, the issuer is required to disclose any fees it is permitted to
impose under the applicable agreement. The permissive sense of 'may' is more
congruous with the structure of the TILA as a whole."
But Scirica sided
with Donovan on the larger question of how the courts should interpret Fleet's
promise of no annual fee.
"Because the TILA is a consumer protection act
designed to provide easily understood information to ordinary consumers, it is
appropriate to make this determination from the point of view of the consumer,"
Scirica found that, at a minimum, such a claim should be
interpreted as promising that no annual fee would be imposed in the first
"Interpreting the statement with an implied annual term is at least
as natural as interpreting it with no such term, so the statement is ambiguous
at best. And because the TILA, which 'should be construed liberally in favor of
the consumer,' is intended to provide clear information to consumers, such
ambiguities should be resolved in favor of the consumer," Scirica wrote.