Thursday, July 4, 2013

Interest rates - Proof of contractual authorization of APR and other finance charges

Effect of creditor's failure to prove contractual authorization for interest rate charges 

In Tully v Citibank (South Dakota) N.A., the Texarkana Court of Appeals found that bank had failed to prove an agreement on the interest rate(s), and therefore failed to prove its damages. The statements in the record had varying interest rates printed on them, and the cardmember agreement that was before the court as a summary judgment exhibit did not state the interest rate or rates (presumably because the APRs and other terms were included in a separate document called "card carrier", which has surfaced in other citibank cases). The Tully court also noted that there were no notices of an increase in the interest rate, and that the statements could not be construed as notice of a change of the terms because the information on statements reflected activity in the past, and the changes could not go into effect retroactively. -- > TILA and Regulation Z; Chase Bank USA N.A. v. McCoy.

Therefore, the court concluded that there would still be a fact issue as to the amount of interest owed even if the interest rate information printed on the statements were considered sufficient to give notice of a change in terms to apply in the future.


“Because Citibank failed to prove the contractual interest rate, Citibank has failed to prove it was entitled to summary judgment. We sustain Tully's second point of error. Because we find the above issue dispositive, we decline to address Tully's remaining arguments contained in his second point of error.”

“Because Citibank failed to prove Tully agreed to the interest rates Citibank charged, Citibank failed to prove its amount of damages under the breach of contract theory.”


With respect to interest, credit (card) accounts can be divided into two categories: a "fixed-rate accounts" and a "variable-rate accounts." A "variable-rate account" is one in which rate changes are part of the plan and are tied to an index or formula, such as the prime rate published by the Wall Street Journal, an internal interest rate that the bank charges its best customers, or LIBOR.

But it is also possible that the same account has different balance balance categories with fixed or variable rates, respectively, or variable rates that are not uniform for all balance categories. Often, the rate applicable to cash advances is higher than the rate that applies to purchases; a promotional rate may apply only to a single transaction, such as a balance transfer from an account held at a different bank, and will often be time-limited.

Additionally, the CMA may specify a penalty rate by a higher margin being added to the prime rate (and thus variable) or as a fixed penalty rate, e.g. 27.24% or 29.99% APR.

Federal law (TILA) requires the creditor to disclose interest rates both initially (when the account is opened; or a solicitation sent by mail); and subsequently, if the change in the interest rate is the result of re-pricing by the creditor, i.e. a change in terms of the existing contract, rather than a hike instituted pursuant to contingencies stated as part of the terms as they are set forth in the cardmember agreement governing the active account. The classic example of the latter is an interest rate hike to a pre-defined penalty rate (or termination of a preferred rate) upon the cardholder's default or a late monthly payment. -- > repricing of existing accounts by banks; -- > triggering events for interest rate hike; -- > adverse action pricing.


Mandatory disclosures under the Truth in Lending Act (TILA)
Interest rate disclosure in mailed mass solicitations - credit card offers
TILA violations and remedies available to consumers
Case note / commentary on Tully v Citibank South Dakota N.A.

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