Ninth Circuit Rejects Class Action Plaintiffs’ Attempt To Narrow TILA’s Variable-Rate Exception

On December 29, 2025, the U.S. Court of Appeals for the Ninth Circuit held as a matter of first impression that the Truth in Lending Act’s variable-rate exception permits credit-card issuers to apply increased interest rates, triggered by an increase in the index to which the rate is tied, to balances owed on variable-rate credit cards during the entirety of the billing cycle in which the applicable index increased.

Key Takeaways

• Applying increased interest rates to variable-rate credit card balances owed during the entirety of the billing cycle in which the applicable index adjusted does not preclude the adjustment from operating “according to an index” under TILA’s variable-rate exception.
• Card issuers should continue to ensure that their rate-adjustment practices are clearly disclosed in credit-card agreements.
• Card issuers can further mitigate risk by ensuring that rate-adjustment practices are consistent month-to-month whether the index increases or decreases. 

Background

Under the Truth in Lending Act (TILA), as amended by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), credit-card issuers are generally not permitted to “increase any annual percentage rate, fee, or finance charge applicable to any outstanding balance” on a consumer’s credit card account. 15 U.S.C. § 1666i-1(a). Under the statutory variable-rate exception, however, the prohibition does not apply to “an increase in a variable annual percentage rate in accordance with a credit card agreement that provides for changes in the rate according to operation of an index that is not under the control of the creditor and is available to the general public.” Id. § 1666i-1(b)(2). In other words, as long as the rate changes in accordance with a publicly available index not within the issuer’s control, and the rate-change application is described in the governing credit-card agreement, card issuers may apply increased interest rates to existing balances.  

Credit-card issuers generally set variable interest rates based on a combination of an index, such as the U.S. Prime Rate, and an issuer-applied margin. Card issuers commonly pick a set date of the month as the date on which the index is used to calculate the interest rate for that month’s billing cycle. The adjusted rate is then generally applied to the balance due and owing for that billing cycle, regardless of whether the charges reflected in the balance were incurred before or after the index adjustment. Card issuers have long viewed this practice as expressly authorized by the variable-rate exception.

In Milliken v. Bank of America, N.A., a Bank of America credit-card customer challenged this practice, asserting a single claim for alleged violation of TILA on behalf of a putative nationwide class. Ruling on the issue of first impression, the United States District Court for the Northern District of California, the Hon. Araceli Martinez-Olguin, rejected plaintiff’s challenge and dismissed plaintiff’s claim with prejudice, holding that the challenged practice falls within the variable-rate exception. Plaintiff appealed to the Ninth Circuit Court of Appeals, which has now affirmed the dismissal.

The Court’s Decision

Plaintiff argued that applying an increased interest rate to the entire billing cycle in which the rate adjusted rendered the rate “proprietary” and argued that the rate was no longer set “according to the operation of an index,” as is required for the variable-rate exception to apply. The Ninth Circuit disagreed. The Court recognized that the variable-rate exception “requires only that the interest rate change ‘according to operation of an index,’ not the operation of an index on a particular date,” as the plaintiff would have it. Op. 7. Accordingly, an interest rate change that applies to a billing cycle beginning before the date of the Prime Rate change, nonetheless, operates “according to” that change in the Prime Rate. Of note, the rate applied by Bank of America did not change based on any other factor: it was always Prime plus a margin; the day of the month on which the Prime rate was used to calculate the interest rate was constant; the applicable billing cycles were not abnormally long; and the rate change was implemented consistently regardless of whether the prime rate increased or decreased in any given month.

The Court also emphasized that Regulation Z, which implements TILA, supports the Court’s reading of the variable-rate exception. Much like the statutory text, the regulation states in straightforward terms that “[a] card issuer may increase an annual percentage rate when . . . [t]he increase in the annual percentage rate is due to an increase in the index” that “is not under the card issuer’s control.” 12 C.F.R. § 1026.55(b)(2). CFPB commentary to Regulation Z also contemplates that credit-card issuers may set interest rate changes to align with billing cycles.  

Finally, the Court was not persuaded by the plaintiff’s attempt to paint a dire picture of the credit card industry that would result under the Court’s reading of the variable-rate exception. The plaintiff suggested that application of the exception here would allow credit-card issuers to take advantage of increased interest rates. But this ignored that any interest rate decreases would operate the exact same way as an increase—inuring to the benefit of consumers rather than creditors. As the Court put it, the CARD Act “does not insulate customers from the consequences of otherwise lawful risks that they knowingly bear,” Op. 20, and the plaintiff here was simply “caught on the wrong side of a rate change,” Op. 6.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Pamela A. Miller, an O’Melveny partner licensed to practice law in New York; Elizabeth L. McKeen, an O’Melveny partner licensed to practice law in California; Danielle Morris, an O’Melveny partner licensed to practice law in California; Bill Sushon, an O'Melveny partner licensed to practice law in New York; Asher Rivner, an O'Melveny senior counsel licensed to practice law in New York and New Jersey; Ashley Pavel, an O'Melveny counsel licensed to practice law in California; and Elena Zarabozo, an O’Melveny counsel licensed to practice law in California and the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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