Supreme Court Decides Fair Credit Reporting Act Cases

by Deepak Gupta

  In an opinion by Justice Souter, the Supreme Court this morning handed consumers an incomplete victory in the consolidated Fair Credit Reporting Act cases, Safeco v. Burr and Geico v. Edo.   For our previous coverage of those cases, including all of the briefs, see here, here, here, and here.  (Disclosure:  My colleague, Scott Nelson, is co-counsel for the respondents.)  In this post, I'm going to attempt a quick summary of the decision, but I hope we'll be able to bring you some additional anaysis in the days to come.

1.  Willfulness Entails Reckless Disregard:  The really good news for consumers today is that the insurance companies lost on the principal question in these cases -- whether  a "willful" violation of the FCRA can be established by proof that the defendant recklessly disregarded the law.  The companies had argued that a willful violation could only be established by proof that the defendant's actions were known to violate the Act, but the Court firmly rejected that interpretation as inconsistent with standard common law usage in civil actions.  The Court also concluded that the FCRA's drafting history didn't shed light on the question either way and that the reckless-disregard standard wouldn't lead to absurd results.   In terms of impact on the run of FCRA cases, this was the most significant question decided by the Court today; a contrary ruling would have made it much harder for consumers to obtain statutory or punitive damages.

2. Adverse Action Requirement Extends to First-Time Rates, But Considering the Credit Report Must Be A "Necessary Condition" of the Increase:  Having arrived at the proper standard of recklessness, the Court then had to decide whether the companies had actually violated the statutory requirement that they send notice to consumers before taking any "adverse action" based on their credit reports.   To make a long story short, the companies had charged consumers higher initial rates for insurance based on their credit reports.  The question was whether that action constituted "an increase in any charge for . . . any insurance, existing or applied for."   

As an initial matter, the Court agreed with the position of the Solicitor General and the plaintiffs--that the word "increase" extended to a first-time rate, consistent with the "ambitious" consumer protection objectives that Congress had in mind when it enacted the FCRA:  "[T]he point from which to measure difference can just as easily be understood without referring to prior individual dealing.  The Government gives the example of a gas station owner who charges more thanthe posted price for gas to customers he doesn’t like; it makes sense to say that the owner increases the price and that the driver pays an increased price, even if he never pulled in there for gas before."   This section of the opinion has some great language about the broad scope and purpose of the FCRA and the need for courts to interpret the statute in a manner that's consistent with Congress's goals.

However, Justice Souter also reasons that the statutory requirement that the adverse action be "based on" the credit report means that "considering the credit report must be a necessary condition for the difference."  It isn't enough, in other words, that the insurance company considered the score and based its score on the rate; the score had to be a "necessary" factor in the decision. 

As Justice Stevens points out in his brief but powerful dissent, the statute says nothing of the sort.   The more natural reading is to focus on what the company actually did rather than what it might have done.  The Court's reasoning, moreover, invites manipulation; companies are free to adopt whatever "natural" credit scores they want.

3.  The Baseline Is The "Neutral Rate," Not the "Best Possible" Rate:  Building on its analysis of the causation issue, the Court next addressed the question of the appropriate baseline: Should the increase be measured against the rate the consumer would have received with the "best possible" credit score, or should it be measured against the rate the consumer would have received if the credit score had not been taken into account (the so-called "neutral rate")?  The Court held that the latter was more appropriate, explicitly tying the baseline question to causation:  If, as the Court had just concluded, Congress required notice only when the effect of the credit report on the initial rate offered was necessary to put the consumer in a worse position than other relevant facts would have decreed anyway, it makes sense to assume that Congress was more likely concerned with the "practical question" of whether the consumer's rate actually suffered instead of the "theoretical question" of whether the consumer would have gotten a better rate with perfect credit.

The Court frankly acknowledged that its reading would leave a "loophole" in the statute because "it keeps first-time applicants who actually deserve better-than-neutral credit scores from getting notice, even when it errors in credit scores saddle them with unfair rates."  But donning his legislator cap, Justice Souter concluded that the loophole was necessary to prevent the problem of "hypernotification"--people would get so many notices of this sort that they would regard them as "formalities" and "formalities tend to be ignored."   The Court offered no statutory or other legal support for this view, just its own policy preference.

4.  Application to the Facts & Objective Unreasonableness:  In the GEICO case, the Court held that because the initial rate offered to the plaintiff was the one he would have gotten if his score wasn't taken into account, GEICO didn't owe him an adverse action notice.  In the Safeco case, the Court ducked the question of whether Safeco violated the statute.  Instead, it held that the question didn't matter because it was clear that any violation wasn't reckless--that is, that it violated an objective standard of disregarding an unjustifiably high risk of harm that is either known or so obvious that it should be known.  This was so because the company's view of the law, although wrong, was not unreasonable.  This was not a case, said Justice Souter, in which the defendant "had the benefit of guidance from the courts of appeals or the Federal Trade Commission that might have warned it away from the view it took."

This final section of the opinion has some unfortunate language.  Justice Souter supports his point about objective reasonableness by dropping a "cf" citation to Saucier v. Katz, a leading case applying the rule that government officials are entitled to qualified immunity in civil rights cases unless their actions violate "clearly established" law.  As a result of years of Supreme Court hostility to civil rights plaintiffs, it's gotten very difficult for plaintiffs in constitutional cases to get around this qualified-immunity hurdle.  The possibility that defendants could try to use today's opinion to import the qualified-immunity standard into the consumer law context is troubling.  In a similarly unfortunate development, the Court notes, parenthetically, that the FTC has "only enforcement authority" rather than "substantive rulemaking authority" with respect to the FCRA, without specifically identifying in what other form the FTC might deliver authoritative guidance that would bear on the question of objective reasonableness. The Court also left undecided the extent to which evidence of subjective bad faith should be taken into account in determining willfulness and expressly left open the possibility that good-faith reliance on legal advice might constitute a defense to liability.

On the whole, however, the decision is about as good as could have been expected, particularly based on the tenor of the oral arguments.  The plaintiffs didn't prevail, but the Court sided with consumers on the two biggest issues in the case--the reckless disgregard standard and the question whether the adverse-action requirement extends to initial rates. 

Comments

[R. Evans]

Deepak, thanks for the blog post. I think everyone should know what is in their credit report. I found a site which shows you the top sites to get your free credit report - http://Credit-Report.SuperSnappy.com - hope that helps.

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[sample of a last will and testament]

Hi,

I heard some thing about Watters v. Wachovia impact that deals with LO's, Mortgage Brokers, etc. I am a salesman, not an attorney and cant understand what this means. Is there somebody out there in attorney land that can explain if this court action impacts independent LO's and Mortgage Brokers.B

[Jennifer]

All of the CRA's are guilty of willful violation of the FCRA. There is too much money to be made in the credit reporting business and not enough enforcement of the laws in place.

As a reporter and volunteer advocate for consumer rights, I have interviewed thousands over the past several years about all aspects of credit, lending, and the credit reporting agencies.

There is a woman who had a derogatory trade line that she beleived was part of a mixed file. She never had an account with that lending institution reporting the charge off. She disputed with all three CRA's and they all claimed it was "validated". The woman disputed with the original creditor obtaining proof the account did not belong to her. She send this letter to the CRA's requesting deletion. One of the three disregarded the follow up letter, the second used the premise that they already investigated and found the information accurate, the third actually responded claiming the letter from the original creditor was fabricated and not authentic. In the course of my investigation, I sat on the line while we did a 3-way call to the original creditor. I heard this woman inquire as to why they claimed her documentation was not authentic. The original creditor denied having made these allegations, and further alleged that no one from the CRA's ever contacted them. They also admitted they are reporting the trade line as defaulted, but not on the consumer who is wronged - but the actual owner of the account.

In another case, a single woman disputed a trade line referencing a reposessed car. The woman did own the same make/model of car as referenced, but her car was paid for in cash and not reposessed. The car company ran her VIN, her social, and had no explanation for the mix up on two of the three CRA's. They produced two separate pieces of documentation requesting the trade line for the charge off/reposession be deleted as it did not belong to her. One CRA deleted as instructed, but the other sent her a letter explaining she was responsible for her husband's bills. She called the special investigator annoyed as she had never been married. The special investigator insisted the woman was lying and requested proof that she was not married. When she asked who she allegedly married, the special investigator became abusive telling her she should know her husband's name.

In yet another case, a woman tried to buy a three in one report with monitoring. She was told that one of the three CRA's reported back to them her social security number was not found. The woman called the number the service provided, and the CRA confirmed they had no files available to her. She asked for something in writing and they consistently refuse to provide it. We all know under the laws, the CRA's are supposed to provide a letter confirming no record on file.

In yet another instance, the CRA stonewalled the consumer who thought his identity had been compromised based on an alert from his bank notifying him of questionable charges that were unusual. The bank resolved quickly and recommended he file a police report, the FTC forms for identity theft and immediately get his credit reports. Great advice! The first CRA supplied his report immediately on-lin and within 24 hours. There was some damage he worked through quickly. The second CRA provided some resistence delaying issue of the credit report by 90 days. The third CRA never provided copies of reports first with their requirement of a written request, second requesting proof of his identity, and every time he sends his identifying documentation, they send another form letter requesting the same information. This guy has been fighting the third CRA and still no closer to getting that report for the past six months.

This only begins to illustrate the need for FCRA enforcement and reform.