23 Mar Retroactive Credit Card Interest Bump Approved by Court
Bank of America can gouge its credit card holders with court approval according to the 7th Circuit Court of Appeals. As if 18% interest isn’t enough, the bank was allowed to get away with increasing the interest rate to 32% retroactively when a credit card account exceeded the credit limit for two successive months.
The credit card agreement provided for such an increase and, despite a possible Truth in Lending Act prohibition to the contrary, Judge Frank Easterbrook approved this pound of flesh extracted by the bank from the consumer.
The opinion of the court compares the oppressive back charge to an over limit penalty fee. Georgetown Law Professor Adam Litwin makes it clear in his Credit Slips article why that analysis is wrong. First, Congress in requiring banks to tell consumers how they will be charged, did not permit the substitution of penalty interest for a specifically stated penalty fee. Second, penalties are not generally allowed in a contract. Damages for failure to meet a contract requirement must accurately reflect the loss or risk faced by the party claiming it was harmed.
Congress, when it created the Truth In Lending Act, took steps to make sure that consumers were given clear information. Allowing banks to back charge interest at an arbitrary rate that is not properly disclosed hides the ball and conceals the amount of the penalty charged to the consumer. This flies in the face of the efforts made to prevent banks from pulling the wool over the eyes of customers.
Contract law in general does not allow contracts to include penalties. Unless there is a clear reason for the amount of a penalty and it directly relates to a specific anticipated loss a penalty is not allowed. Courts are not permitted to enforce arbitrary penalties in contracts even if both parties have agreed to the penalties and the amounts are specified.
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