Consumer Law & Policy Blog

Seventh Circuit: Under FCRA, A Credit Report Must Be Both Accurate And Clear, And Accuracy Doesn't Necessarily Equal Clarity

By Brian Wolfman

[Introductory Note: This post was updated on May 6, 2007, to eliminate potential ambiguity pointed out by a careful reader.  Nothing of substance has changed from the original post on May 5, 2007.]

The Seventh Circuit just issued a short, powerful decision concerning the Fair Credit Reporting Act's fundamental requirement that “[e]very consumer reporting agency shall, upon request . . . clearly and accurately disclose to the consumer [a]ll information in the consumer’s file at the time of the request.” 15 U.S.C. § 1681g(a)(1).  In Gillespie v. Equifax Information Services, L.L.P., No. 06-1952 (May 3, 2007), the court reminded the world that a technically accurate disclosure is not necessarily a clear disclosure -- and both accuracy and clarity are required to meet the Act's requirements.  In Gillespie, the plaintiffs requested their credit reports, which, among other things, listed the "date of last activity" on certain collection accounts.  Depending on what event triggered the listing in this category, the report could lack clarity as to when delinquency had occurred.  Having clarity on this point could be important to the consumer because, under FCRA, a consumer report may not include “accounts placed for collection or charged to profit and loss which antedate the report by more than seven years.” 15 U.S.C. § 1681c(a)(4).  Here's the Seventh Circuit's key holding:

We conclude that the consumer reporting agency must do more than simply make an accurate disclosure of the information in the consumer’s credit file. The disclosure must be made in a manner sufficient to allow the consumer to compare the disclosed information from the credit file against the consumer’s personal information in order to allow the consumer to determine the accuracy of the information set forth in her credit file. In writing § 1681g(a)(1), Congress requires disclosure that is both “clearly and accurately” made. An accurate disclosure of unclear information defeats the consumer’s ability to review the credit file, eliminating a consumer protection procedure established by Congress under the FCRA.

Fifth Circuit Issues Decision On CAFA's "Local Controversy" Provision

By Brian Wolfman

   

Last week, in Preston v. Tenet Healthsystem Memorial Medical Center, Inc., No. 07-30132, 07-30160 (Apr. 25, 2007), the Fifth Circuit issued a decision concerning the “local controversy” provision of the Class Action Fairness Act, 28 U.S.C. 1332(d)(4).  CAFA devotees ought to look at this one.  It’s actually readable: only 17 pages and in plain English.

    In the original class action complaint filed in Louisiana state court, the plaintiffs alleged injuries and deaths caused by unreasonably dangerous conditions at defendants’ medical facilities during Hurricane Katrina.  The defendants removed under CAFA, but the district court remanded under the local controversy provision.  The Fifth Circuit reversed, holding that the plaintiffs had failed to show that at least two-thirds of the proposed class members were domiciled in Louisiana when the class action was filed.  Under the local controversy provision, the district court “shall decline to exercise jurisdiction” if “greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed” and several other facts are present.

Consumer Groups Turn Up The Heat On Michael Baroody, President Bush's Nominee To Head The CPSC

by Brian Wolfman

Back on March 1, we blogged about the Bush Administration's nomination of Michael Baroody (pictured here), a longtime high-ranking executive with the National Association of Manufacturers, to chair the Consumer Product Safety Commission.  While at the NAM, Baroody has opposed many health and safety regulations.  If anyone can point to a regulatory initiative in the consumer health and safety arena that he has supported, please let us know.  The CPSC's principal role is to promulgate and enforce those kinds of regulations.

Eight national consumer protection groups, including Public Citizen, the Consumer Federation of America, Consumers Union, and U.S. PIRG, have teamed up to oppose Baroody's nomination.  A discussion of that effort, as well as other information about Baroody, is available here at The Consumerist.

Incentives and the Secondary Market: Ted Frank Responds to Chris Peterson

by Ted Frank

Christopher Peterson disagrees with my assessment of subprime mortgages:

In [Ted Frank's] view the market is currently adjusting to the problems in mortgage origination. Everything will work out if we just leave the markets alone because "lenders have every incentive to lend only to those who can repay." I disagree. The current legal system creates the incentive for loan brokers and originators to (1)take large commissions and closing costs, (2) pass off bad loans to the secondary market, (3) distribute the revenue from lots of closings to management and employees, (4) wait for the bankruptcy code's preference window to close, then (5) declare bankruptcy when the secondary market tries to exert its recourse options.

Except what Peterson is describing is intentional securities fraud, for which there already exists plenty of civil and criminal deterrent. Management doesn't escape scot-free: in the First Alliance Mortgage case, its chairman and CEO, Brian Chisick, was on the hook for $20 million in an FTC action over that bankrupt company's mortgage practices, even aside from the losses he incurred from the drop in value in his equity interest in the company.

Moreover, in such a scenario, the secondary market investors lose their money in their investments—surely deterrent enough to engage in appropriate due diligence to not invest in a fly-by-night operation that is issuing bogus loans. Why victimize them twice? The only thing that accomplishes is to punish the honest by creating an infeasible risk premium.

The multiply-illegal scam Peterson posits (involving mortgage fraud, securities fraud, and possibly bankruptcy fraud and breaches of fiduciary duty) just is not a viable business model for any reasonable length of time: can we identify anyone who is living high off the hog through these means?

What happens when lenders don't care if they are repaid?

by Christopher Peterson

In today's Wall Street Journal, Ted Frank, with the American Enterprise Institute, argues that the current meltdown in the subprime mortgage market justifies neither legislative nor judicial reform. In his view the market is currently adjusting to the problems in mortgage origination.  Everything will work out if we just leave the markets alone because "lenders have every incentive to lend only to those who can repay."

I disagree.  The current legal system creates the incentive for loan brokers and originators to (1)take large commissions and closing costs, (2) pass off bad loans to the secondary market, (3) distribute the revenue from lots of closings to management and employees, (4) wait for the bankruptcy code's preference window to close, then (5) declare bankruptcy when the secondary market tries to exert its recourse options.

Mr. Frank’s analysis ignores the agency costs of front line players in the industry, and it conflates the profitability of loan originating companies with the profits kept by the management of those companies.  While there is nothing inherently wrong with securitization of mortgage loans, or other financial assets, we must accept the reality that the current system of funding subprime mortgages does not preserve the traditional mortgage market’s underwriting incentives.  Instability and predatory lending will persist as long as the secondary market, and in particular, the investment banks that package mortgage backed securities can pass off bad loans to investors without fear of liability.

Brief Filed In Critical California Supreme Court UDAP Case

By Brian Wolfman

    Way back on September 15, I blogged here about an effort by Public Citizen and the Center for Auto Safety to convince the California Supreme Court to review a ruling that, if allowed to stand, would gut California's consumer protection laws.  The California Court of Appeal had ruled that California's Proposition 64 requires consumers to show "reliance" to prevail under those laws.  (As you may recall, Proposition 64 got rid of the so-called private attorney general provisions of California's consumer protection laws.)  Then, here, I blogged again after the California Supreme Court granted review.

    With the able representation of California consumer lawyer Jeff Fazio, Public Citizen and the Center for Auto safety have now filed their amicus brief on the merits.  Because a fundamental premise of modern consumer protection law has been that the plaintiff need not prove reliance, the California Supreme Court's decision in this case is likely to be very important. 

Preventing Contamination Of Our Food Supply: Is FDA Up To The Task?

Today's Washington Post contains this article about the recent spate of serious food contamination incidents around the country and asks whether the FDA has the capacity to keep the food supply safe.  Here's the beginning of the article, which is worth reading in its entirety:

The Food and Drug Administration has known for years about contamination problems at a Georgia peanut butter plant and on California spinach farms that led to disease outbreaks that killed three people, sickened hundreds, and forced one of the biggest product recalls in U.S. history, documents and interviews show.

Overwhelmed by huge growth in the number of food processors and imports, however, the agency took only limited steps to address the problems and relied on producers to police themselves, according to agency documents.

Congressional critics and consumer advocates said both episodes show that the agency is incapable of adequately protecting the safety of the food supply.

Uncle Sam: Dangerously Careless With Our SSNs

Ed Mierzwinski over at U.S. PIRG's consumer blog has this informative piece about recent U.S. government disclosures of our social security numbers.  Ed links to stories in today's New York Times and Washington Post describing these disclosures in detail.  Worth a look.

Bush Administration Antitrust Policy

    You may be interested in this recent Washington Post article by Steven Pearlstein about the laxity of the Bush Administration's antitrust policy.  The article discusses a number of recent mergers on which the Bush Administration took a pass and a new academic paper reporting on a study in which 100 leading antitrust lawyers were asked to compare the current legal environment to a decade ago on a scale of 1 to 5, where 1 was tough antitrust enforcement and 5 was lax enforcement.  The score: 4.9.

More On The Federal Judicial Center's New Report On CAFA From The Lead Author

by Tom Willging

[Ed. note:  Tom Willging is a Senior Researcher at the Federal Judicial Center and an expert on class actions.  Among other things, he helped write the Manual on Complex Litigation.  Note the request for assistance at the end of Tom's post]

    You probably haven't heard enough about CAFA lately. As the Federal Judicial Center's long-term study of the impact of CAFA on the federal courts plays out, we have delivered our third--that's right third, time flies--report on the Judicial Conference's Advisory Committee on Civil Rules. We blogged earlier, here and here, about whether our results were surprising. Now, with 16 months of data after CAFA went into effect, there's no surprise in the number of case brought into the federal courts: at least 300 and perhaps as many as 364 appear attributable to CAFA. More newsy, though, is a shift in the type of cases. The initial wave consisted mostly of cases filed in state courts and removed to federal courts. Most of the more recent increase, though, comes in the form of diversity cases filed originally in federal courts. Figure 4 in the report tells this story in graphic format. Diversity cases before CAFA typically came into federal court by removal. Now they more often arrive as original actions. We also present data on the courts where the increased cases were filed. Though dispersed across the district courts in all circuits, Figure 5 shows that the 9th seems to have had a special impact, particularly focused in Central (L.A.) and Northern (SF) California.  We're still looking for a partner to work with us in studying activity in one or more state courts. Anyone interested?