Yesterday the Seventh Circuit upheld a district court decision permitting the retroactive application of penalty credit card interest rates to existing balances. Writing for the court, Judge Frank Easterbrook noted that (1) the plaintiff's state law claims were preempted by the National Bank Act and (2) the plaintiff's Truth-in-Lending Act/Reg Z claim that she did not receive proper notice of the repricing was not tenable.
Most of the opinion addresses the TILA claim. It's very technical, but Judge Easterbrook recognized that the applicable Reg Z language as well as the Federal Reserve Staff's comment on Reg Z are ambiguous. Easterbrook resolves the ambiguity by playing economic equivalence:
"It would be lawful for a bank to impose an over-limit fee (say, $75) in the first month, then increase the periodic rate of interest only for successive months. As the Bank’s actual practice of back-dating the penalty rate has the same economic effect as a fee in the initial month, it is hard to see why one method should be allowed and the other prohibited…. Structuring penalty interest to have the same effect as a penalty fee in the initial month therefore does not undermine the goal of advance-notice requirements. Swanson and others in her position still can shop for better rates for future months."
Two problems with this statement.