Card Issuer's Responsibilities Made Clearer Under New Proposal
The Federal Trade Commission (FTC) supports a proposal by the Federal Reserve Board to clarify that credit car issuers must conduct a reasonable investigation when consumers dispute charges on their credit card bills. If a dispute with a merchant remains unresolved, the issuer must investigate the matter before it can consider the dispute settled, report disputed amounts as delinquent, or begin efforts to collect disputed amounts 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. Under the current law, it is not exactly clear what card issuers must do when cardholders exercise their rights under this provision. The commentary proposed by the Reserve Board would make it clear that card issuers must conduct a reasonable investigation of the dispute. The FTC also recommended that the Reserve Board 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 the merchant's story, relaying it to the cardholder, and declaring the dispute settled. In its comments on the proposed regulation, the FTC noted that the intention of Congress in including the claims and defenses provision in the TILA 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 and the disputed amount. "If 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 cardholders' disputes, but also as to broader objectives of card issuers' incentives to bear some responsibility for the merchants with whom they deal," the FTC said. Toward that end, the FTC recommended the following:
- Amplify the staff commentary to make it clear that the card issuer should make an independent assessment of a cardholder's claim on the basis of factual data obtained from both the consumer and the merchant and also any other available sources.
- 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.
- 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 outstanding amount. This notice should be given to the consumer each time the card issuer tells a consumer that it has resolved a claim and defense dispute against the cardholder and resumes billing for the charges.
Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.
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