Pursuant to revisions to Regulation Z, effective July 1, 2010, a creditor cannot use the term “fixed” to describe an annual percentage rate (APR) “unless the creditor also specifies a time period that the rate will be fixed and the rate will not increase during that period, or if no such time period is provided, the rate will not increase while the plan is open.” 12 C.F.R. § 226.5(a)(2)(iii). While this new regulation cannot be applied retroactively in form, the United States Court of Appeals for the Ninth Circuit recently issued a decision (Rubio v. Capital One Bank) that constitutes a retroactive application in effect, despite the court’s express denial of doing same.

In Rubio, the plaintiff alleged that Capital One violated the Truth in Lending Act (TILA) relating to a February 2004 direct-mail credit card solicitation. The solicitation listed the credit card’s APR for purchases in its “Schumer Box” (a table required by federal law) as a “fixed rate of 6.99%.”  An asterisk was included, linked to a paragraph printed just below the Schumer Box that stated:

All your Annual Percentage Rates (APRs) are subject to increase if any of the following conditions (“Conditions”) occur: (i) you fail to make a payment to us when due; (ii) your account is overlimit; (iii) or your payment is returned for any reason.

Further down on the same page, under the heading “Terms of Offer,” the solicitation provided, as part of the terms: “I will receive the Capital One Customer Agreement and am bound by its terms and future revisions thereof. My Agreement terms (for example, rates and fees) are subject to change.”

In 2007, Capital One increased the interest rate on the plaintiff’s card due to the rise in market interest rates, not because of her meeting any of the three enumerated Conditions. The Ninth Circuit held that “it is not ‘clear and conspicuous’ to describe an APR as ‘fixed’ when the creditor has reserved the right to change the APR for any reason.” The Court made this decision based upon empirical evidence from the very same consumer studies that motivated the new regulation quoted above.

In other words, the court determined that the use of the word “fixed” in a 2004 solicitation to describe an APR was deemed misleading based upon studies in 2006 and 2007, upon which a regulation not effective until 2010 was based. Yet, the Ninth Circuit emphasized that this did not make the new regulation retroactive, and stated:

What was misleading in 2006 and 2007, when the consumer studies were conducted, was also misleading in 2004, when Rubio received Capital One’s solicitation. The new regulation and the empirical studies it relies on are therefore relevant and informative for this case.  For even where not binding, an agency’s interpretation of a statute certainly may influence courts facing questions the agency has already answered. . . . TILA has always prohibited misleading APR disclosures. Our holding is simply a concrete application of that prohibition.

One judge on the three-judge panel dissented, pointing to a discussion in the Comments to Regulation Z showing that a fixed-rate account is one not tied to an index or formula as a part of the credit plan. The dissenting judge, therefore, deemed the use of the term “fixed” as accurate because the account did not involve pre-planned rate changes. Thus, the dissent explains, the real dispute should be the clarity of the disclosure, which is a question of fact that could be decided either way and; therefore, should not be decided by the court as a matter of law.

Whether you agree with the majority or the dissent, Rubio presents a cautionary tale of the danger of liability under TILA for prior disclosures despite the governing regulations at the time.