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Unfair and Deceptive Acts and Practices: 6.5.3 Uncovering Deception in Excessive Charge Cases

Cases that involve excessive charges rather than deception are more difficult to attack in jurisdictions where the state UDAP statute only prohibits deception, not unfairness or unconscionability. Even where the statute prohibits unfairness, a court may be reluctant to substitute its judgment for the agreement it perceives the parties as having negotiated. For these reasons, it is helpful if there is evidence of deception as well as unfairness.

Unfair and Deceptive Acts and Practices: 4.1 Introduction

This chapter provides a synopsis of precedent interpreting the terms “deceptive” (or “fraudulent”), “unfair,” and “unconscionable” as delineated in the FTC Act and state UDAP statutes. It analyzes not just the definition of these terms, but also how the UDAP development of these terms rejects limitations that apply to common law fraud and contract claims. The meaning of “abusive,” used in a small number of UDAP statutes,1 has not yet been developed in state court decisions, but is sketched out in the final section of this chapter.

Unfair and Deceptive Acts and Practices: 4.2.8 Despite Industrywide Practice

It is no defense to a deception claim under the FTC Act that the challenged practice is engaged in throughout an industry or is “customary” business conduct.110 State UDAP case law also follows this approach.111 For example, the practice of quoting interest as a “per annum” rate, computed on the basis of a 360-day year, violated California’s UDAP statute even though it was a “customary” business practice within the banking community.112 Commercial

Unfair and Deceptive Acts and Practices: 4.2.12.1 Introduction

At common law, to establish a fraud claim the consumer must prove that the misrepresentation was material and that they justifiably relied upon it. These requirements are significant impediments to fraud claims, particularly in class actions. Reliance, especially justifiable reliance, can be difficult to prove, and a requirement of showing reliance would complicate a private UDAP action.

Fortunately, the FTC and many courts in FTC Act and UDAP cases have held that reliance need not be shown, or may be presumed. Materiality likewise may be presumed.

Truth in Lending: 7.12.1.3 Examples of Unsolicited Issuance

Under the Fair Credit Reporting Act, a creditor is permitted to use lists of consumers provided by credit bureaus to extend “firm offers of credit” to these consumers.1423 Standing alone, these firm offers of credit do not constitute the unsolicited issuance of a credit card in violation of TILA § 1642.1424 However, if a “firm offer of credit” is accompanied by the credit card itself, it will violate TILA’s prohibition against unsolicited issuance, despite being permissible under the FCRA.

Truth in Lending: 7.12.2.1 Credit Feature Cannot Be Added on an Unsolicited Basis

A credit card issuer cannot add a credit feature to a non-credit card, except in response to an explicit oral or written request or application for the credit feature from a consumer.1431 For example, the granting of overdraft privileges on a checking account when the consumer already has a check guarantee card constitutes issuance of a credit card.1432 A card issuer can add credit features to an existing credit card without specific request, however, assuming that required disclosures are p

Truth in Lending: 7.12.2.2 Thirty-Day Waiting Period Before Adding a Credit Feature to a Prepaid Card

A prepaid card that accesses a “covered” credit feature is a hybrid prepaid-credit card.1438 Thus, the addition of a covered credit feature to a prepaid card constitutes the issuance of a credit card.1439 In addition, the rules regarding prepaid cards go even further than for other credit cards by imposing a thirty-day waiting period before an issuer can offer, provide, or solicit a consumer to add a separate credit feature that would make a prepaid card into a hybrid prepaid-credit card.

Truth in Lending: 7.12.3.1 General

A card issuer can issue a card in renewal of or in substitution for an accepted card without the consumer’s explicit request or application.1450 A substituted card may be issued by a creditor who purchases the accounts of the original issuer, as long as use of the original card is cut off when use of the new card becomes possible.1451 However, a creditor cannot issue a renewal or substitute card if the credit card account has been closed.1452

Truth in Lending: 7.12.3.2 One-for-One Rule

The official interpretations impose a “one-for-one rule”: in general, a creditor may not issue more than one credit card as a renewal or substitute for an accepted card.1460 A creditor may, however, replace an accepted combined debit/credit card with a credit card and a separate debit card.1461

Truth in Lending: 7.12.3.3 Acceptance of the Prior Credit Card

A creditor can issue a renewal or substitute credit card only if the original credit card had been “accepted” by the consumer. An “accepted credit card” is one which the consumer has requested and received, signed, used, or authorized another to use.1466 Thus, acceptance of a credit card can occur in a number of ways.

Truth in Lending: 7.12.4 Protections Apply to All Types of Credit Cards, Including Telephone Cards

The credit card issuance restrictions in Regulation Z apply to all credit cards, even if they are issued for use in connection with otherwise exempt extensions of credit.1475 A 1984 amendment, aimed primarily at telephone credit cards, made this coverage clear.1476 Calling cards issued by a telephone company are subject to TILA’s issuance restrictions even if the user is merely allowed to defer payment until the monthly bill is received, rather than rolling over the balance from one

Truth in Lending: 7.12.5 Enforcement of the Prohibition Against Unsolicited Issuance

A creditor’s violation of TILA’s prohibition against unsolicited issuance of a credit card entitles a consumer to actual damages under section 1640(a).1480 It should also entitle the consumer to statutory damages.1481 If an unsolicited issuance claim is brought affirmatively, it is subject to TILA’s one-year statute of limitations.1482 A consumer unable to bring a TILA claim may be able to bring a state UDAP or common law claim.

Truth in Lending: 7.13.1 General

Some credit cards are issued by banks or other financial institutions which have a deposit account relationship with the card user.

Truth in Lending: 7.13.2.1 Consensual Security Interests

Regulation Z allows the card issuer to take a consensual security interest in the deposit account, and to enforce that interest.1502 But the security interest must be affirmatively agreed to by the consumer (boilerplate language should not suffice), be disclosed in the account-opening disclosures, and be taken and enforced only through procedures equally available to other creditors.1503 The official interpretations specify that the security interest may not be the functional equivalent of t

Truth in Lending: 7.14.1 General

The Truth in Lending Act includes some restrictions on the relationship between the card issuer, the cardholder, and the person or entity honoring the card (referred to herein as the merchant or seller, since that is most often the case).

Truth in Lending: 7.14.2 Tie-Ins

TILA provides that the card issuer may not require a seller to open an account or procure any service from the card issuer (or other person such as an affiliate, agent, or subsidiary) as a condition to participation in the credit card plan.1538 This flat prohibition is modified in Regulation Z, which allows the card issuer to mandate an account or service which is “essential to the operation of the credit card plan.”1539 For instance, if maintaining an account for clearing purposes is essent

Truth in Lending: 7.14.3 Prompt Crediting of Refunds

When a credit card has been used to purchase merchandise or services from a third-party seller, and the merchant accepts a return or otherwise forgives the debt, the merchant must transmit a credit to the card issuer within seven business days1540 through normal channels. The card issuer must then credit the consumer’s account as of a date within three business days from its receipt of the credit.

Truth in Lending: 7.14.4 Discounts and Surcharges

A merchant may allow a discount of any size from the regular price to induce payment by cash or check rather than by use of a charge or credit card.1545 The discount must be offered to all customers, and its availability must be clearly and conspicuously disclosed. If these conditions are met, the discount is not a finance charge.1546 If the conditions are not met, the discount is a finance charge which must be disclosed in advance.1547

Truth in Lending: 7.15.1 Record Retention Requirements

Open-end creditors and card issuers must keep evidence of their compliance with TILA’s disclosure and procedural requirements for two years.1563 This includes evidence as to compliance with such procedures as refunding credit balances and correcting adverse credit reports after billing error disputes.1564

Truth in Lending: 7.15.2 Treatment of Credit Balances

Creditors must refund any credit balances within seven business days1568 from receipt of a written request from the consumer.1569 This requirement also applies to closed-end credit accounts.1570 For open-end accounts, creditors must also appropriately identify credit balances on periodic statements.1571