The Federal Trade Commission said today that it supports a proposal by the Federal Reserve Board to clarify that credit card issuers must conduct a reasonable investigation when consumers dispute charges on their credit card bills -- and the disputes remain unresolved with the merchants -- before the credit card issuers can consider the disputes settled, report disputed amounts as delinquent, or begin efforts to collect disputed amount from consumers. A consumer's right to withhold payment for such disputed charges is spelled out in the "claims and defenses" provision of the Truth in Lending Act (TILA).
Under Section 170 of the TILA and Section 226.12(c) of its implementing Regulation Z, when a merchant fails to resolve satisfactorily a dispute as to property or services purchased with a credit card, the cardholder may assert against the card issuer all claims (other than tort claims) and defenses arising out of the transaction and relating to the failure to resolve the dispute. This law is known as the "claims and defenses" provision of the TILA.
Under the current law, it is not clear what card issuers must do when cardholders exercise their rights under this provision. The commentary proposed by the Fed would make clear that card issuers must conduct a reasonable investigation of the dispute. The FTC also recommended that the Fed provide guidance on what constitutes a "reasonable" investigation. The Commission stated that it does not believe a card issuer would meet its obligation to conduct a "reasonable" investigation simply by accepting a narrative of the merchant's subjective view of the dispute, relaying it to the cardholder, and declaring the dispute settled.
The FTC comments address proposed revisions to the Fed's official staff commentary regarding Regulation Z. The commentary provides binding guidance to industry in complying with the regulation. The Fed published the proposed changes in a notice in the Federal Register on Dec. 7, 1995, and announced it was seeking comments on them.
In its comments, the FTC noted that the intention of Congress in including the provision in the TILA regarding disputed amounts on credit card bills was to allow consumers to withhold payment from the card issuer while an amount remains disputed, and to preserve their rights in any future legal action involving the creditor regarding the disputed amount. The latter objective can be achieved only if card issuers are genuinely held liable for their responses to consumers' claims in the first instance, the FTC said.
"If card issuers can thwart cardholders" actual assertion of claims and defenses by causing cardholders to believe that their only recourse is with the merchant, the aims of [the provision] are frustrated not only with respect to individual cardholder's disputes, but also as to broader objectives of card issuers' incentives to bear some responsibility for the merchants with whom they deal," the Commission said. Toward that end, the FTC recommended that the Fed:
- amplify in the staff commentary what a "reasonable investigation" means to indicate that it is a flexible standard, but that it clearly requires the card issuer to do more than merely convey the merchant's view of the dispute to the consumer and declare the dispute settled (the language should specify that credit card issuers make an independent assessment of a cardholder's claim based on factual data obtained wherever possible from the merchant and the cardholder, together with whatever other data the card issuer may have available, the FTC suggested);
- prohibit a card issuer from beginning collection activities on a disputed amount and from reporting the amount delinquent until the reasonable investigation is completed and the dispute is settled; and
- require card issuers to give a consumer a statement of his or her rights, including the right to sue a card issuer and defend against a suit brought by the issuer for the out- standing amount, each time the card issuer notifies a consumer that it has resolved a "claims and defenses" dispute against the cardholder and resumes billing for the charges.
The Commission vote to file these comments was 4-1, with Commissioner Mary L. Azcuenaga dissenting, and stating that the reasonable investigation requirement "could impose substantial costs on card issuers that likely would be passed on to consumers." She added: "It would have been prudent first to determine whether a problem exists under the current incentive- based scheme before advocating the imposition of this regulatory requirement." Azcuenaga also dissented from the Commission's recommendation that the Federal Reserve require card issuers to send cardholders a statement of their rights when a dispute remains unresolved after an investigation. This recommendation is intended to address the concern that card issuers might misrepresent that cardholders have no further recourse. Azcuenaga said a "more direct and less regulatory solution" might be to prohibit the misrepresentations, instead of requiring the recommended disclosure of information each time card issuers resolve the merits of a dispute.
Copies of the Commission's comments and Commissioner Azcuenaga's full statement are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710. FTC news releases and other documents also are available on the Internet at the FTC's World Wide Web site at http://www.ftc.gov
(FTC File No. P964804)