Friday, January 30, 2009

Credit Balance Transfer Offer Could Violate California False Ad Laws

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

A credit cardholder can pursue claims that Chase Bank violated California unfair competition and false advertising laws by offering a promotional fixed rate of 4.99% on balance transfers and then applying a 28.74% rate to a transferred balance of $10,200, the U.S. Court of Appeals in San Francisco has ruled.

According to Chase, the cardholder lost eligibility for the promotional rate because of a late payment he had made to another creditor about three months before he accepted Chase’s October 2004 balance transfer offer (BTO).

In July 2004, the cardholder had made his final mortgage payment one day after the thirty-day grace period. The mortgage lender had reported that his account was “30-days delinquent” to Experian, Inc., a credit report agency.

Prior to sending the October BTO, Chase had accessed the cardholder’s Experian credit report in August and September 2004. If Chase had discovered the late payment during either of those credit reviews and elected to impose a non-preferred rate because of that late payment, Chase’s computer system would have automatically cancelled any pending offers, including the BTO. Chase, however, did not cancel the BTO before the cardholder accepted it, and his account did not reflect Chase’s knowledge of his late payment until the end of October.

Truth in Lending Act “Safe Harbor”

Chase complied with the federal Truth in Lending Act (TILA), the court held. In its BTO and Cardmember Agreement, Chase disclosed that the cardholder could lose eligibility for the promotional interest rate if he failed to make any minimum payment to Chase or another creditor by the due date.

While Chase’s TILA compliance provided it a “safe harbor” from state law liability, the safe harbor would extend only to state law claims based on the sufficiency of Chase’s disclosures, according to the court.

State Law Claims

California’s Unfair Competition Law applies to “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by” the False Advertising Law. The False Advertising Law makes it unlawful to “induce the public to enter into any obligation” based on a statement that is “untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading.”

If Chase knew or should have known about the cardholder’s late payment before he accepted the BTO, Chase could not rely on the TILA to bring its conduct within the safe harbor from state law liability, the court determined.

The court found that the lack of a notation in the cardholder’s Chase file about his late payment until the end of October gave rise to two possible inferences: (1) that Chase did not discover the late payment until noting it in his file in October; or (2) that Chase discovered the late payment in a prior month, but decided not to impose the 28.74% non-preferred interest rate and thereby waived its right to do so.

If Chase knew or should have known about the late payment, but waited to apply the non-preferred rate until after the cardholder accepted the BTO, Chase’s conduct may give rise to an Unfair Competition Law claim, the court held. Chase’s conduct also might give rise to claims for fraudulent unfair competition and false advertising because a cardholder receiving the BTO could likely be deceived into believing that Chase would not later apply a non-preferred rate based on a late payment it had waived.

Summary judgment rejecting the state law claims was reversed. The case was remanded for further proceedings.

The January 23 decision in Hauk v. JP Morgan Chase Bank USA, will be reported in the CCH Advertising Law Guide.

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