Modification of credit terms: interest rate hikes, higher fees, and other finance charges

Increases in Interest Rates (APR) and Fees as an Issue in Credit Card Actions 

This post discusses the issue of modification of credit terms in the context of debt collection litigation.

Federal law (TILA) requires written disclosure of initial terms of consumer credit as well as modification of such terms later. As a matter of state contract law, contract-modification has the same elements as contract-formation under state law, and as such requires proof of mutual assent. The creditor should accordingly be held to the burden of proving contractual authorization of interest rates actually shown as having been used to calculate and assess finance charges on monthly account statements or similar account history, especially when there was an interest rate hike and a very high rate was applied for an extended period of time prior to the lawsuit having been filed, with the result of augmenting the amount of the debt (damages pleaded for) considerably.

MODIFICATION OF TERMS FALLS UNDER TILA 

The federal Truth in Lending Act (TILA) requires disclosure in writing of changes in credit terms in additional to initial disclosure of terms when the consumer credit account is set up. -- > TILA Disclosures

CONTRACT LAW REGARDING MODS MIRRORS GENERAL CONTRACT-FORMATION PRINCIPLES 

State law governing modification of contracts requires the same essential elements to be satisfied that are required for valid formation of the initial contract: offer and acceptance with respect to the new terms, and a meeting of the mind on them.

The terms will typically be offered by the bank, but they will also have to be accepted by the customer. Therefore, when the bank sues to collect a debt that includes interest accrued at the modified rate, it should also be held to the burden of proving contractual assent to the modified rate, which -- at least in cases that end up in court -- is typically a higher rate, sometimes a much higher one.

REJECTION OF PROPOSED CHANGE IN TERMS (rarely seen in debt suit)

Rejection of new terms proposed by the bank - either via separate change-in-terms notices or notices included in the monthly statement ("bill stuffer") may result in the account being cancelled and not being available for future use. See sample opt-out instruction with announcement of consequences used by Capital One in 2007.



Sample Opt Out Provisions from Notice of Change in Terms
 issued by Capital One in 2007

Sample Citibank Notice of Interest Rate Increas

with opt out clause



Whether rejection will entail such adverse effect will depend on the terms of the existing contract and proposed changes, and whether the creditor follows through with the cancellation (which may not be in its economic interest in the case of a profitable customer) or lowers the credit limit to the existing balance as a functional equivalent of cancellation.

The issue of rejection of a modification of terms rarely arises in debt collection, not to mention documentary evidence thereof. What is commonly seen is evidence of an increase in the interest rates to very high levels (27.24% in the case of Amex cards or 29.99% APR in account issued by Chase Bank USA, N.A.) from a lower rate as reflected on copies of account statements produced by the bank or its assignee in support of a motion for summary judgment. The attorney for the creditor/plaintiff will typically argue that the cardholder did not complain until the lawsuit was filed, and that the finance charges are therefore legitimate. If the contractual basis is missing, however, this is a questionable argument under contract law.

IMPLICATIONS FOR LITIGATION 

If no signed modification agreement is offered, the plaintiff would have to prove offer and acceptance of the modified terms, such as an increase in the interest rate with proof that the defendant was given notice of the proposed changes, and that he/she accepted them by continuing to use account; or did not expressly utilize the out-out mechanism that may have been included in the notice of proposed changes in terms. Change-of-terms notices vary with regard to the specifics of opt-out provisions, if they contain them at all.

If the cardholder merely continued to make payments on the account, doing so should not be deemed acceptance of new terms because the cardholder would not have the option to discontinue making payments since the modification in terms would not cancel the preexisting repayment obligation as to a revolving balance. Stated differently, the card member did not have the option to cease making payments merely to express disapproval of the proposed changes. This would hardly be a viable excuse for not making payments in subsequent litigation predicated on Defendant's default. Therefore, the plaintiff should not be able to rely on that type of evidence to support the proposition that the Defendant consented to the rate hike.
   
But the caselaw regarding the effectiveness of interest rate changes, and the associated evidentiary burdens for the plaintiff to enforce finance charges accrued at a different (usually higher) rate is murky, perhaps because the argument was not clearly made in the trial court and/or on appeal. At least one case is on point in finding that account statements that did not show any card use subsequent to an interest rate hike could not furnish evidence of acceptance by the customer, and therefor could not relieve plaintiff from proving mutual agreement on altered terms.  

VARIATION OF FINANCE CHARGES OVER TIME AS SHOWN ON MONTHLY STATEMENTS

The documentary record is not consistent across debt collection cases that involve increases in the interest rate(s) applied to revolving balance(s), not to mention those that led to an opinion on appeal. In some cases, the only evidence of a change in terms are found on the account statements themselves. But differing interest rates shown at different times on monthly account statements does not prove that those interest rates were set and applied in conformity with the applicable contract.

If interest rates vary on different statements over time, the interest rate must have been defined as a variable interest rate (pegged on the prime rate or similar index), or there must have been a change in terms of the original interest rate. Either way, proof of the underlying contract provisions is needed.

What complicates the matter is that the underlying contract, or some supplement, may have defined contingencies that would trigger an interest rate hike (penalty or default rate). Another scenario is that the bank offered a lower interest rate for a limited time (lower relative to the regular rate).

The same applies, analogously, to fees. If, for example, different amounts of late fees appear on monthly statements at different times, this suggests are change in terms, unless the underlying contract set different monthly flat fees based on the amount of the revolving balance, or the amount required to be paid as a minimum monthly payment amount.

But variations in interest rates and fees over a series of monthly statements merely supplies evidence that different finance charges were imposed as a matter of fact; it does not prove that the applicable contract authorized them. But such proof forms part of the Plaintiff's burden of proof.

PROOF OF CONTRACTUAL AUTHORIZATION FOR HIGHER FEES AND APR 

To establish that the finance charges were correctly assessed based on the underlying TILA disclosures/contract terms, the plaintiff would have to prove up the underlying contract and its term AND the modifications in such terms by change notice(s) or by a superseding agreement.

In the case of an expiration of a special (low) rate offer, written evidence of the terms of the offer would have to be adduced, including the duration of the preferential rate and/or definition of events that precipitate a reversion to the normal rate (regardless of whether the special rate offer falls under TILA).  

Although the law would seem to be clear in requiring a showing of contractual authorization for the interest actually charged as evidenced by monthly statements, courts do not always hold the Plaintiff to this component of its burden of proof, but instead want to know if the Defendant disputed the rate, or if there is any evidence that the rate was incorrect (i.e., not authorized), thus shifting the burden of proof to the defendant.

Additionally, creditors and their attorneys may attempt to circumvent the proof requirements as it relates to contractual authorization of finance charges by resorting to the alternative theory of account stated. The account stated theory as a vehicle to avoid having to prove up the terms of the contract is addressed in another post. Also see -- > account stated and contractual choice of law.

EXAMPLES OF CHANGE IN TERMS NOTICES BY CREDIT CARD ISSUERS 

US Bank Reservation of Right to Change Credit Terms:

[more forthcoming]

LACK OF PROOF OF ORIGINAL APR AND/OR CHANGES IN RATES OVER TIME

In Tully v. Citibank the Texarkana court of appeals held that Citibank was not entitled to summary judgment on its breach of contract claim (or either of the other two causes of action, which were nonviable for legal reasons) because it had not proven the defendant’s agreement to the interest rates shown on monthly statements. The court noted that the interest rate was not specified on the cardmember agreement; that there were no notices of changes in terms announcing an increase in the interest rate; and that the variable APRs appearing on monthly statements could not qualify as notices in change of terms retroactively even if they were otherwise deemed a satisfactory substitute for formal notices of changes in terms.

RELATED TOPICS AND BLOG POSTS 

Elements of contract formation involving a written contract without both parties' signatures
Contractual authorization of APR and account fees (finance charges)
Requirement of proof of the terms of a loan contract under Texas law
The relevance of the Truth in Lending Act (TILA) to debt collection litigation
Interest rate hikes

Arbitration vs Litigation - PROs and CONs in credit card collection context

Can an arbitration clause work in favor of the consumer sued on a debt? 

BENEFITS OF ARBITRATION TO THE DEBT SUIT DEFENDANT 

 
The official rationale for the public policy preference in favor of arbitration, and ADR in general, is that is provides a more efficient and less expensive mechanism for resolution of disputes in a private setting.   

Unlike mediation, however, which will result in a resolution only upon consent of both parties to the terms of a settlement facilitated by the mediator acting as a disinterested third party, the arbitrator renders a decision (arbitration award) that is binding upon the parties whether they like it or not. The arbitrators essentially performs the role of a judge, but is not a public official. 

Arbitration thus bears great resemblance to a court proceeding, but it still offers a number of distinct advantages over a court proceeding. At least for one party to an arbitration clause within a contract.   
   
Providing a benefit to customers was likely not the motivation for most credit card issuers to write arbitration provisions into account agreements. But the fact is that most such agreements still contain them, and they are equally available to both parties. Even if a credit issuer substituted a new cardmember agreement that omits arbitration to replace an earlier version, this may not cancel the right to arbitrate if the prior agreement contained an arbitration clause that was irrevocable. 

By filing a debt collection suit, the bank or its assignee has already expressed a preference for litigation over arbitration. But the defendant still has a choice, assuming there is no dispute as to the identity of the contract that governs the parties’ relationship (-- > existence of arbitration agreement; -- > contract formation).

ARBITRATION BEFORE AND AFTER INITIATION OF A DEBT COLLECTION SUIT

If the consumer has a choice to opt for arbitration prior to a lawsuit being filed, he or she can avoid a public record of a lawsuit having been filed in which he is the defendant (though that may eventually also happen after an arbitration, if the consumer loses, does not pay the debt, and the creditor files a suit to confirm arbitration award.)  

But even when a debt collection lawsuit is already on file, the Defendant should in most cases be able to better protect privacy by moving for arbitration because the creditor will then have to make its case privately in arbitration, rather than publicly in court. Court proceedings always create a public record and motions to seal the record are virtually unheard-of in debt collection cases. So, if a debtor does not want to have a public record, arbitration would seem to be the better forum, or will at least delay the creation of a public record. These days, of course, Creditors simply file collection suits en mass and do not bother with arbitration. 

Protection of Privacy Interests

If a motion for summary judgment is filed in a credit card debt suit, it often entails years worth of spending on credit cards becoming a matter of public record as summary judgment exhibits. Some defendants may not care if copies of credit card statements are filed in court, but others may not wish to have their spending history revealed to anyone who might be interested. In many court systems, exhibits are now accessible over the web along with pleadings and other court-filed documents.  

Additionally, sensitive information, such as social security numbers, birth dates, income and employment data, may make into the court’s file also (and possibly on-line), even if such information is supposed to be redacted. Plaintiffs' attorneys and their law office staff do not always take care to remove or blacken out protected information. Sensitive information of this nature typically appears on credit applications. Though not routine, some plaintiffs include an application for a credit card among their exhibits. In other types of debt collection litigation – such as on lines of credit and promissory notes – the inclusion of the application for credit as a summary judgment or trial exhibit is even more common.

Discovery Burdens 

The normal rules of discovery that govern a lawsuit filed in a Texas court do not apply in arbitration. The same is true of such matters as deadlines as they are found on court-issued docket control orders.  To the extent a creditor’s attorney has a policy of serving a load of discovery requests, the defendant can avoid the hassle of having to respond to it, and would not face a motion to compel or a motion for sanctions that would otherwise be authorized under the discovery rules.

By having the debt matter dealt with in arbitration, the consumer can also avoid being subpoenaed through the court system, on pain of contempt of court for noncompliance with the subpoena.

Depositions are rarely taken in debt collection suits. But it does happen occasionally and private court reporters that transcribe the question-answer-session are expensive. If the deponent loses, the cost of the deposition, which may run into the hundreds of dollars or more, qualifies as a part of the “taxable cost” of the lawsuit, and the looser becomes liable for it in addition to the amount of the judgment.

Grace period to weigh options and improve settlement posture

Although arbitration is touted as a quicker method of dispute resolution, this may not be the case. Particularly when the creditor and the lawfirm it retains for litigation are not set up to arbitrate cases on a large scale and in an efficient manner. 

If the diversion to arbitration results in a delay, it may provide the defendant additional time to earn or otherwise raise funds for a settlement, or to contemplate whether or not to file for bankruptcy. A delay in the resolution of a debt case may be of particular benefit to a debtor who is unemployed, but not unemployable, assuming continued improvement in the relevant job market enhances the prospect of improving his or her financial condition.

Additionally, if a defendant insists on arbitration, and this causes inconvenience to the Creditor or its lawyers, the chances of settlement on more favorable terms may improve.

Enforceability

An arbitration award constitutes a final authoritative resolution of the case, just like a judgment, but it is not enforceable as a judgment unless and until it is confirmed by a court of competent jurisdiction. This requires a return back to court and a proper motion to confirm (if a case was filed in court first and abated) or an independent lawsuit filed for the sole purpose of confirming the arb award and turning it into a judgment, with all the consequences such a judgment entails, -- such as execution and recording of an abstract of judgment in the county’s real estate records, and garnishment of bank accounts. 

DISADVANTAGES OF OPTING FOR ARBITRATION OF A DEBT SUIT

The Texas Rules of Civil Procedure and Rules of Evidence do not apply in arbitration because arbitration organizations have their own rules of procedure.

Therefore, in cases in which these rules could be invoked to secure a resolution in the defendant’s favor in court, they may not be effective in arbitration notwithstanding the applicability of the substantive law regardless of whether the case is in judicial or arbitral forum. The procedural aspects and admissibility issues are a different matter.

Examples would be objections to authenticity of documents and challenges to the competency and qualifications of affiants, particularly in the case of debt collection suits brought by downstream debt-buyers at the end point of a chain of assignments.  Such evidentiary objections are often successful in court in defeating a motion for summary judgment, and may also prove effective at trial. On the other hand, many arbitrators were previously judges, and may be receptive to evidentiary arguments because have had plenty of occasion to deal issues of authenticity and admissibility while on the bench.  

AVOIDING THE EFFECT OF DEEMED ADMISSIONS - "PLAN B" FALL-BACK 

That said, a motion to compel arbitration might be an alternative method to deal with deemed admissions because the deemed admissions would not be valid as a substitute for evidence in another proceedings. 
  
Since the Texas Supreme Court has set the standard for withdrawing (or striking) inadvertent deemed admissions rather low, however, a move for arbitration to avoid the consequences of not having answered requests for admission in a timely fashion will often be unnecessary. Still, it may provide a Plan-B option should the trial court, contrary to expectations, rule against the defendant’s motion to strike deemed admissions, which is the proper mechanism to deal with this type of problem.

A plaintiff avoid the effects of deemed admission (i.e. its failure to answer requests for admission served on it by the Defendant’s counsel) by non-suiting the pending action and causing it to be dismissed without prejudice to re-filing it later. 

But a non-suit is not an option for the defendant. Even if the Defendant had become a plaintiff by asserting a counterclaim for wrongful debt collection practices, a nonsuit by the Defendant as Counter-Plaintiff would only dispose of the counterclaim. It would not make the Creditor's claim go away. 
  Stated differently, the Defendant has no equivalent mechanism to terminate the lawsuit unilaterally and return the parties to their original positions. But a motion to compel arbitration might be a way to get the case into a different forum. To avoid claims of waiver, however, such a motion should not be filed late in the game. --> Waiver of the Right to Arbitrate by Litigation Conduct 

Last updated: 12/9/2018