The United States District Court for the District of Maryland partially granted summary judgment in favor of plaintiffs in a class action alleging violations of the Truth in Lending Act. Plaintiffs filed a class action against defendant alleging violations of TILA and the Maryland Consumer Protection Act over defendant's practice of using funds in customers' checking and savings accounts to offset debt the consumers incurred on their credit card accounts under its Delinquent Loan Transfer Program. Section 1666(h) of TILA and its implementing Regulation Z prohibit offsetting a cardholders indebtedness arising out of a consumer credit transaction against the funds held in deposit with the card issuer unless there is prior written authorization from the cardholder. The issue before the court was whether the offset was affected by "enforcing a consensual security interest in the funds" as described under Regulation Z.
Rejecting defendant's argument that Regulation Z permits a creditor to offset an account so long as the creditor has a consensual security interest in the funds, the Court found that Regulation Z actually contains a blanket prohibition on offsets. The Court highlighted other means of lawfully gaining access to a customer's deposit funds (e.g., attachment and court order). Thus, in order to make a prima facie allegation of violations of Section 1666(h) of TILA and Regulation Z, plaintiff is only required to show that a credit card issuer has taken the deposit funds and used them to satisfy the consumer's credit card debt.
Ultimately, the Court looked to the FRB's Regulation Z Official Staff Commentary to hold that the loan documents (i.e., the VISA Agreement and the Account Information Booklet), were insufficient evidence of a consensual security interest as required to defeat the blanket prohibition against offsets under Regulation Z. In particular, because the security interest provision was not set apart, but rather "buried on the eighth of twenty pages of fine print" and "rather than referring to a specific account number or dollar amount, the [security interest] provision simply refer[ed] to 'any' and 'all' accounts," the Court held that the security interest provision in the loan documents were the kind of "routine" provision that the Staff Commentary expressly prohibited. Click here for the opinion.
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