Consumer Law & Policy Blog

Supreme Court Decides Fair Credit Reporting Act Case

United States v. Bormes is the Supreme Court's first opinion of the term.  It deals with the question of where to look to determine whether the government has waived sovereign immunity in FCRA cases.  SCOTUS Blog coverage can be found here.

Constitutional Challenge to Fair Credit Reporting Act Rejected

In the wake of the Supreme Court's decision last year in Sorrell v. IMS Health, there's been a lot of speculation about the extent to which previously accepted commercial speech regulation may now be subject to "heightened" or strict scrutiny under the First Amendment. Sensing an opportunity, lawyers who regularly represent consumer reporting agencies invoked Sorrell in their defense of a suit under the Fair Credit Reporting Act, arguing that a provision of that 40-year-old statute violates the First Amendment.

In King v. General Information Services, plaintiff Shamara King claims that when she applied for a job with the U.S. Postal Service, defendant GIS prepared a background-check report in connection with her employment application that included details about a past car theft arrest. Including that information in the report violated the FCRA, which forbids consumer reporting agencies from reporting adverse information (except for a criminal conviction) that “antedates the report by more than seven years.” 15 U.S.C. 1681c.

GIS's brief argued that the FCRA provision is a “content- and speaker-based restriction on speech,” because it prohibits only credit reporting agencies, and nobody else, from reporting this type of truthful, public information. "Sorrell," according to GIS, "marks a dramatic shift in the protection afforded to content- and speaker-based restrictions on truthful commercial information. ... [I]ts holding has sweeping effects on many other laws restricting disclosure of commercial information, including FCRA."

Not so fast. Last week, Judge Petrese Tucker of the U.S. District Court in Philadelphia soundly rejected this constitutional challenge and, with it, the notion that Sorrell marks a sea change in the law of commercial speech. The appropriate standard, she concluded, is not strict scrutiny but rather the intermediate scrutiny ordinarily applied to commercial speech regulation under the Central Hudson test. Applying that test, she concluded that the chalenged FCRA provision directly advances Congress's goal of balancing consumer privacy with the need for credit reporting in a way that is no more extensive than necessary. The court's analysis closely tracks arguments made in the brief filed by the United States. Congratulations to my former CFPB colleagues Kristin Bateman and David Gossett, who worked on the government's brief along with lawyers from the Justice Department and the FTC, and to consumer advocate Jim Francis, who represents Ms. King in this case.

Lea Krivinskas Shepard on Discrimination in Consumer Protection

Lea Krivinskas Shepard of Loyola Chicago has written Toward a Stronger Financial History Antidiscrimination Norm, 53 Boston College Law Review (2012).  Here's the abstract:

This Article examines a topic at the intersection of consumer protection and antidiscrimination law: the use by employers and licensing organizations of applicants’ credit reports and financial histories in the hiring and licensing processes. The Article begins with a broad normative assessment of the merits of the practice by examining applicable “logics of personhood,” categories of a framework of antidiscrimination analysis that assesses whether traditionally unprotected groups are entitled to formal antidiscrimination safeguards. Thus, the Article considers whether financial histories validly and reliably reflect personality traits relevant to job performance. It then examines to what extent the use of financial history in the employment and licensing settings is a necessary and helpful deterrent to debt default — long regarded as a socially undesirable practice. Next, the Article evaluates the practice’s impact on traditionally disadvantaged groups by assessing its relationship to racial equality and social mobility. Finally, in a novel application of behavioral economics to the area of credit reports and financial history, this Article suggests that, in spite of the difficult conceptual distinctions between consumer debtors and traditional Title VII categories like race, sex, and national origin, the findings of behavioral economists suggest that an adverse financial status is more immutable than neoclassical economists have been willing to concede. These observations lend critical normative support to legislative efforts to establish a stronger financial history antidiscrimination norm.

Judge Debevoise on the Wackiness of the Fair Credit Reporting Act

by Jeff Sovern

Burrell v. DFS Services, LLC, 753 F.Supp.2d 438 (D.N.J. 2010) is a couple years old now but we haven't blogged about it before and the problem it describes has not been fixed so it still merits atttention.  Burrell was victimized by an identity thief and complained about it to the creditors rather than, at first, the credit bureaus.  Burrell sued the creditors for, among other things, violating the Fair Credit Reporting Act by reporting incorrect information about him to credit bureaus and failing to investigate when Burrell told them about the problem.  The creditors moved to dismiss.  Judge Debevoise wrote:

Though the Court is loath to reward their effort to hide behind the esoteric strictures of the FCRA to defeat claims by a layperson like Mr. Burrell—who could not possibly have been expected to comply with the procedural requirements of that statute and who attempted to address the theft of his identity in a manner that most similarly-situated consumers would consider reasonable—Defendants' arguments relating to Mr. Burrell's FCRA claims are legally, if not morally, correct.

Judge Burrell also opined:

[The FCRA's] stated purpose is to “require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information.” 15 U.S.C. § 1681(b). Yet cases like this one lead the Court to wonder how Congress could have possibly believed that the FCRA would carry out those functions. It is of little value to ordinary consumers, in part due to the fact that it is hopelessly complex—the statute is drafted in hyper-technical language and includes a sufficient number of internal cross-references to make even the most dedicated legal practitioner consider a change in career. But the FCRA's substance is even more troubling than its complex form. The statute includes numerous provisions that limit consumers' ability to enforce its mandates either by explicitly barring private actions or by imposing such burdensome procedural requirements that no layperson could possibly be expected to comply.

I'm omitting much of what the judge had to say about the FCRA, but here is another part of his complaint:

[T]he FCRA generally requires creditors to make sure the information they send to credit rating agencies about a consumer's behavior is correct, but allows the creditors to delegate that duty to consumers by posting an address to which they can complain. It then allows the creditors to ignore consumer complaints by prohibiting them from bringing suit. In order to effectively keep a creditor from distributing inaccurate information, consumers must submit disputes not to the credit card companies and other creditors with which they regularly interact, but to credit reporting agencies—obscure third parties with which they are unlikely to be familiar. Those requirements have the practical effect of insulating creditors, such as Defendants, from liability even in cases where they fail to take basic measures to protect their customers. Instead, the FCRA places the burden of ensuring the efficient functioning of the credit reporting system on the consumers themselves—laypeople who are, in most cases, in no position to carry out that task by jumping over the technical hurdles created by the statute. Such a scheme is troubling, to say the least.

The court also determined that Burrell's state law claims were preempted by the FCRA.  In so doing, Judge Debevoise discussed the conflict between two of the FCRA's preemption provisions, in sections 1681h(e) and 1681t.  In my view, those provisions cannot be reconciled. Yet courts faced with figuring out which one governs have to reconcile them anyway.  Courts have created at least four different approaches for doing that, one of which is on view in Burrell.  So that's two big problems with the FCRA (not that there aren't others).  Anyone know why Congress wrote the two preemption provisions the way they did or section 1681s-2 so as to trigger the creditor's obligation to conduct an investigation upon the credit bureau's complaint rather than the consumer's?  Was it simple sloppiness?

(HT: Dee Pridgen)

Graphic Explains How Credit Scores are Calculated

Here.  It might serve for a series of slides for those teaching consumer law.

Paper on Behavioral Economic Approach to Credit Reporting Consumer Protection

Adi Osovsky, a Harvard SJD candidate, has written The Misconception of the Consumer as a Homo Economicus: A Behavioral Economic Approach to Consumer Protection in the Credit Reporting System, forthcoming in the Suffolk University Law Review.  Here's the abstract:

The significant increase in the number of consumer transactions, along with the expansion of information technology, have created massive amounts of detailed information on each individual's credit history. Consumer credit reporting agencies ("CRAs") play an important role in this financial information market.

Although the credit reporting system has significant economic benefits, CRAs have a tarnished reputation as far as consumer protection is concerned. While making their business out of gathering, compiling and analyzing consumers' information, CRAs generally do not have privity of contract with those very same consumers and thus have little or no incentive to protect consumers' privacy and ensure the accuracy of every single credit report. Such lack of incentive has resulted in numerous consumer problems, including inaccuracies in credit reports and erroneous credit scores; infringement of consumers' right to privacy; contribution to the prevalence of identity theft; and the creation of a fertile ground for consumer manipulation through targeted marketing lists.

This paper suggests that the current regulatory system has been captivated by the misconception of the consumer as Homo Economicus. Existing regulation has given consumers a significant role in facilitating the production of more accurate credit, envisioning rational, vigilant and alert consumers, who regularly monitor their credit reports, dispute errors and opt-out from marketing lists. However, studies have shown that consumers' rationality in decision making is in fact doubtful, and so too is the justification of imposing monitoring responsibilities on consumers.

The paper challenges the economic regulatory approach through the behavioral economic approach – a relatively new model that aspires to explain consumers' biases and cognitive limitations, which are absent in the standard economic framework. The paper then explores two potential consumer protection mechanisms, drawn from the behavioral economic framework: applying psychological tools, such as disclosure and framing, for a better designed system; and enhancing consumer financial literacy.

DOJ Reaches Historic Lending Discrimination Settlement With Wells Fargo for $175 Million

Wells Fargo Bank, the largest mortgage lender in the country, has agreed to pay more than $175 million in a landmark settlement with the Justice Deparment over allegations of racial discrimination against African-American and Hispanic borrowers. Wells is paying $7.5 million to the City of Baltimore to settle its separate fair-lending suit against the lender.

This is the second-highest fair lending settlement in history. According to the DOJ's press release, the settlement "provides $125 million in compensation for wholesale borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin," as well as "$50 million in direct down payment assistance to borrowers in communities" (including Baltimore) with large numbers of discrimination victims. The settlement also includes a review process with additional compensation for retail borrowers who were placed into subprime loans where similarly situated white borrowers received prime loans. The Los Angeles Times has an article on the settlement here, the DOJ press release is here, and the consent decree is here. 

Times Pieces

by Jeff Sovern

Yesterday the Times ran a piece, New Agency Plans to Make Over Mortgage Market, about some things going on at the CFPB as it approaches its first anniversary.  Last Sunday, the Times printed a letter repeating the usual right-wing canard that government regulation, including the Community Reinvestment Act, contributed to the subprime crisis.  My reply in the Times appears here, but Alan White provided a more complete refutation here. 

William Black on Examining Lending Discrimination Practices and Foreclosure Abuses

 

William K. Black

 of University of Missouri at Kansas City has written Examining Lending Discrimination Practices and Foreclosure Abuses.  Here's the abstract:

The incidence of fraud in stated income loans is 90 percent. It is overwhelmingly the lenders and their agents that prompted these frauds. Over two million fraudulent mortgage loans were made in 2006 alone. It was overwhelmingly fraudulent loans to borrowers who lacked any ability to repay their loans out of their income that caused the housing bubble to hyper-inflate. Endemic accounting control fraud in the origination of mortgages led to creation of 'echo' fraud epidemics in other contexts, including widespread appraisal fraud, endemic fraud in the sale of mortgages and mortgage derivatives, widespread predatory lending targeting Latinos, blacks and the elderly, and endemic foreclosure fraud. Fraudulent lenders use compensation to create perverse incentives in which bad ethics drives good ethics out of the marketplace. Fraud begets fraud. The federal government, California, and dozens of financial firms have sued the largest banks for fraud, yet the Justice Department refuses to even conduct a meaningful criminal investigation of the largest banks. Absent vigorous financial regulators that understand control fraud and make reducing and sanctioning such frauds their top priority the prosecutors cannot succeed against an epidemic of accounting control fraud. Financial regulators who make the necessary criminal referrals and provide the FBI with the expertise to identify and investigate accounting control fraud mechanisms are essential if we are to prevent or prosecute an epidemic of such frauds. Effective financial 'regulatory cops on the beat' are essential to our ability to prosecute elite white-collar criminals.

Cato Institute Paper on the Fair Credit Reporting Act and Preemption

Jim Harper

 of The Cato Institute has written Reputation Under Regulation: The Fair Credit Reporting Act at 40 and Lessons for the Internet Privacy Debate.  Here's the abstract

More than 40 years ago, Sen. William Proxmire (D-WI) guided the Fair Credit Reporting Act (FCRA) through Congress, seeking to improve the operations of the credit reporting industry. The complexities and tensions in a reputation system like credit reporting are formidable, however, and the FCRA has not satisfied consumer group demands for accurate, responsive, fair, and confidential credit reporting. In fact, new problems have emerged, such as credit repair fraud and identity fraud.

Credit reporting today is anything but the confidential service Proxmire hoped for. Passed in tandem with a financial surveillance law called the Bank Secrecy Act, the FCRA has been turned toward government and corporate surveillance, providing little or no privacy or control for consumers.

As economic theory predicts, the credit reporting industry appears to have benefited from the ossifying effects of regulation. Though the information and technology environments have changed dramatically over the last four decades, the credit reporting and reputation marketplace has seen little change or innovation. A potential related market for identity services is also stagnant thanks in part to government policies.

When Congress chose to preempt common law remedies for wrongs done by credit bureaus, it withdrew a tool that could have guided credit reporting toward better service to consumers and a more innovative and vibrant marketplace. With uniform national regulations, we cannot know how credit reporting might have evolved for the better.