Consumer Law & Policy Blog

Some Further Thoughts on Safeco v. Burr

by Scott Nelson

Blogging about lost cases is about as satisfying as kissing your sister, but I wanted to add a few additional thoughts to those expressed by Deepak in Monday's post on Safeco v. Burr.  In the interest of full disclosure, I should note that I was co-counsel for the respondents, who lost the case despite winning a couple of the key issues.

  Willfulness and Recklessness: The principal reason the insurance companies gave for seeking review by the Supreme Court in the first place was that the Ninth Circuit's ruling that FCRA's willfulness standard is satisfied by a showing of "reckless disregard for the law" was erroneous and out of step with the holdings of other circuits.  For a change, the Supreme Court ultimately agreed with the Ninth Circuit on that point and adopted a much more consumer-friendly standard for recovery than the insurance companies advocated.

Under the companies' view of the world, enhanced remedies should only be available under FCRA if a defendant violated the statute knowing that its conduct was illegal.  The Supreme Court's ruling makes enhanced penalties available without regard to whether a defendant actually knew or believed it was violating the law, as long as the defendant's conduct was reckless, which the Court's opinion equates with a highly unreasonable interpretation of the law.

  Interestingly, the Court's opinion appears to resolve, without actually acknowledging the existence of, considerable confusion about whether recklessness is a subjective or objective standard, or even a little of both.  Justice Souter comes down squarely for an objective standard of recklessness in civil cases, defining recklessness as disregard of a high risk of harm that the defendant either was or should have been aware of.

Our Casebook is Out!

This is a completely self-serving plug for our new casebook, which I co-authored with John A. Spanogle, Ralph Rohner, and Dee Pridgen.  I'm delighted to report that it is now available, with a teacher's manual to follow shortly and a compilation of statutes expected to be available later this summer.  The book, titled Consumer Law Cases and Materials and published by Thomson/West, covers established consumer law topics, including deception, disclosure (such as TILA), consumer credit (including credit reporting, debt collection, and credit discrimination), and warranties.  It also contains materials on emerging consumer law areas, such as privacy, predatory lending, and mandatory arbitration.  We tried to include a balance of cases and problems to introduce students to the area, while also citing to recent writings on consumer law (including this blog).  Professors teaching in the area should receive review copies shortly if they haven't already.  If you would like to order a copy, you can do so here.

Utilities and Payday Loans: A Dangerous Combination

The National Consumer Law Center today issued a very interesting report on how utilities are funneling their most financially-vulnerable customers to payday loan stores.

As the report explains, when utilities send their customers to pay bills in the storefronts of ultra-highcost payday lenders, those customers become targets for predatory loans.  The practice is widespread.  A review of lists of authorized payment stations of 21 large utility chains found more than 650 licensed payday lenders.  To utilities, the use of payday lenders as authorized bill payment agents provides an inexpensive way to satisfy customers’ demands for locations where they can pay utility bills in person and in cash.  Payday lenders make the deals in order to bring into their establishments potential customers for their ultra-high-cost loan products.  In fact, payday lenders so covet the traffic generated by bill payment that some bypass making arrangements with utilities and offer “unauthorized” bill payment services.  Why utility customers?  Because there are millions of them.  And those who pay bills in person have some of the characteristics--low-income, minority, female, elderly--that make them prime targets for payday lenders. 

Among other things, the NCLC report recommends (1) that regulators prohibit utilities from using payday loan stores as authorized payment centers and (2) that utilities discourage customers from paying bills where ultra-high-cost loans are marketed and transacted, and provide them with safe alternatives.

Sixth Circuit Reverses Dismissal of Claim Alleging That Discover Card's Harassing Collection Activity Led to Cardholder's Suicide

by Brian Wolfman

Anyone interested in the potential human costs of debt collection harassment should read the Sixth Circuit's recent decision in MacDermid v. Discover Financial Services, No. 06-5792 (May 29, 2007).  The complaint in the case alleged that the plaintiff's wife, who suffered from bipolar disorder, committed suicide because of Discover's harassment of the couple over $15,000 in credit card debt.  The district court dismissed most of the claims on the pleadings and two claims at the summary judgment stage.  The Sixth Circuit reversed the dismissal of the claim that Discover had intentionally inflicted emotional distress or engaged in "outrageous conduct" in violation of Tennessee common law.  The court of appeals ruled that the plaintiff at least stated a claim for outrageous conduct based on Discover's threats of criminal prosecution for the failure of the plaintiff and his wife to pay a purely civil debt.  The court affirmed the dismissal of various claims under Tennessee law (including a wrongful death claim) and the federal Truth in Lending Act and Fair Debt Collection Practices Act.  The facts alleged - - including the wife's heart-wrenching suicide note - - are stated in detail at the beginning of the opinion.

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.

Supreme Court FCRA Decision in Safeco

The Supreme Court's FCRA decision in the Safeco case is available on the SCOTUS Blog here.

First Circuit: State cannot regulate bank-issued gift cards

by Richard Alderman

The First Circuit has held, in Metabank v. Ayotte, that a state cannot regulate the terms of stored value, or gifts cards, issued by a bank and sold by a third party retailer.  This decision does not bode well for legislative attempts to protect consumers who often unknowingly purchase gift cards that have hidden charges or early expiration dates.

In its opinion, the court noted that the case was “about the power of a state to regulate activities of national banks and national thrifts if these activities are carried out by third-party agents.” At issue was a New Hampshire statute restricting the sale of "gift certificates," including stored value giftcards issued by national banks and national thrifts that carry expiration dates or are subject to administrative fees. New Hampshire Consumer Protection Act, N.H. Rev. Stat. Ann. § 358-A:2 ("New Hampshire CPA"). The district court granted summary judgment to plaintiff’s concluding that the New Hampshire CPA was preempted as applied to products sold by national banks and thrifts. The First Circuit affirmed.

The court noted that stored value gift cards come in two varieties: retail giftcards and bank-issued giftcards. Retail giftcards are similar to traditional gift certificates in that they are issued by a retailer, are serviced by a retailer or its agent, and can only be used at that retailer Bank-issued giftcards may be sold by a retailer, but they are issued by a bank, typically carry the logo of a payment network such as Visa or MasterCard, and can be used at any location that accepts debit cards of the same payment network. The giftcards at issue issued by were bank-issued giftcards. These cards carried an expiration date and were subject to administrative fees that reduced the redeemable value of the card after a certain period of time or after certain events, such as the loss and replacement of the card. The cards, therefore, were subject to the New Hampshire CPA.

To determine whether the National Bank Act preempts the enforcement of the New Hampshire CPA, the court first determined whether a national bank's enumerated and incidental powers include the issuance of stored-value giftcards with expiration dates and administrative fees and the marketing and sale of those giftcards through third party agents. If a national bank has these powers, we must then determine whether the CPA limits the bank's ability to exercise that power.

The court noted that “There is little dispute in this case that a national bank has the power to issue stored value cards that carry expiration dates and administrative fees. The OCC has determined that the issuance and sale of electronic stored value systems, such as giftcards, is an activity incidental to the business of banking.” Therefore, the question was whether the New Hampshire CPA frustrates the exercise of that power. The court concluded that it did, and, therefore, was pre-empted.

Fed Proposes Amendments to Regulation Z for Credit Card Accounts

by Brian Wolfman

On May 23, the Federal Reserve Board proposed revisions to Regulation Z regarding disclosures of the cost of credit for credit card accounts (sometimes referred to as "open-end" credit).  Regulation Z implements the federal Truth in Lending Act (TILA).  This effort represents the first comprehensive overhaul of Regulation Z since 1981.  Most of the proposed changes are non-substantive and concern, as does most of TILA, the type and manner of credit disclosures.  One arguably more substantive proposal would require creditors to give borrowers 45 days' notice when terms of the account are changed.  (Currently, only 15 days' notice is required.)

The Fed's proposal and a range of related documents are available here on the Fed's website.  Comments are due within 120 days of the date that the proposal is published in the Federal Register.  Publication should occur shortly.  (It is possible that the proposal has been published already, but I could not a Federal Register version.)

Department of Education Proposes New Student Loan Rules, and its Student Loan Office Gets a New Chief

Check out this article in today's Washington Post describing regulations proposed yesterday by the U.S. Department of Education that would, as the Post explains it, "prohibit lenders from showering universities with gifts to drum up business."  The proposed rules were issued in response to "a nationwide investigation of the $85 billion-a-year [student loan] business that has exposed financial ties among lenders, school officials and government regulators."  Critics claim that the proposed rules are too weak.  They also complain that, even if finalized, the new rules would not go into effect until mid-2008 at the earliest.

The article also notes that there will be new leadership in the Department's student loan office, as Lawrence Warder, the Department's CFO, was named acting head.  Last month, the former head of that office, Theresa Shaw, resigned.

CPSC Recalls for May 2007

The Consumer Product Safety Commission's recalls and product safety news for May 2007 can be found here.  By checking out this page, you can learn about products that pose safety hazards to consumers and, where applicable, how to obtain product fixes, replacements, and refunds.