In a victory for lenders, a federal appeals court in Chicago has ruled that banks do not have to make in-depth Truth-in-Lending Act disclosures to private-label credit card recipients. The U.S. Court of Appeals for the Seventh Circuit rejected an argument by Harry and Patricia Benion that Banc One Corp. should have provided them the more extensive disclosures required for closed-end credit when it financed the couple's purchase of a satellite television system.
Instead, the court said Banc One only had to give the less onerous disclosures for open-ended credit because it "reasonably expected to have at least some repeated transactions" on the EchoStar credit card issued to the Benions.
Industry lawyers said this is the first time a federal appeals court has ruled on whether private-label credit cards are subject to open- or closed- end Truth-in-Lending disclosures.
At least 12 similar cases are pending at the trial court level.
"This is very significant for the private-label credit card industry," said Craig A. Varga, a partner at the Chicago law firm Varga, Berger, Ledsky, Hayes & Casey, who represented Banc One. "It is an exhaustive discussion of what constitutes a reasonable expectation of repeat purchases."
"This opinion could not have come out any better for the industry," said Alan Kaplinsky, a partner at the Philadelphia law firm Ballard, Spahr, Andrews & Ingersoll.
"This will provide a shot in the arm to private-label credit card providers.
"There was a lot of fear out there that if the courts had tightened the definition of open-ended credit it would have been much more difficult to issue this type of credit," he said.
Daniel Edelman, a partner at the Chicago law firm Edelman & Combs, who represented the Benions, did not return calls for comment.
Bankers, consumer advocates, and regulators have been sparring for years over how to define the differences between closed-end and open-end loans.
The Federal Reserve Board recently clarified the definition a bit, saying any bank product with a credit line customers use repeatedly is considered open-ended.
But it did not define what constitutes a "reasonable expectation" of additional purchases.
The issue is important because closed-ended rules require lenders to calculate a finance charge, which is the total amount the borrower will pay over the life of the loan.
Lenders argue that is impossible to do if the consumer could use the card to make additional purchases. But consumer advocates assert that without the finance charge calculation borrowers cannot know the loan's total cost.
The case began in 1995 when the Benions bought a satellite dish from Superior Satellite, an authorized dealer for products distributed by EchoStar Communications. The dish and a year's worth of programming cost $4,000.
Rather than paying cash, they applied for and received an EchoStar credit card, with a credit limit of $4,500. The terms of the card required the first purchase be used for a satellite dish and subsequent purchases were limited to products to complement the dish, such as televisions, video recorders, and pay programming.
Banc One, which issued the card for EchoStar, disclosed the 19% interest rate, but it did not specify the total finance charge, which is the total amount of interest that will be paid over the life of the loan.
The couple sued EchoStar and Banc One for violating the Truth-in-Lending Act. The suit blossomed into a class action involving 50,000 satellite dish buyers. A federal judge dismissed the case last year, and the Benions appealed to the seventh circuit. The Benions are not expected to appeal any further.