Consumer Law & Policy Blog

Senate Hearing Today on Credit Repair Organizations and Telemarketing Fraud

The Senate Commerce Committee is holding a hearing at 2:30 this afternoon on telemarketing (specifically, the Do-Not-Call list and proposals to improve it, as well as telemarketing fraud aimed at seniors) and the Credit Repair Organizations Act (CROA).

The CROA may not be the best-known federal consumer protection statute, but it's an important one.  It was passed in 1996 to address abuses by credit repair organizations, outfits that take money for services that will purportedly improve a consumer's credit score.  The legislation was the result of a rare alliance between consumer advocates and credit reporting agencies, who were getting swamped with dispute letters generated by credit repair services.  The Act requires certain disclosures, provides for a 3-day right to cancel, prohibits the acceptance of payment before services are performed, and prohibits any person--not just "credit repair organizations"--from engaging in certain deceptive acts.  (The statute has thus been applied to lawyers, debt collectors, and payday lenders in certain circumstances.)  CROA has strong civil liability provisions, including punitive damages.

Connnecticut consumer advocate Joanne Faulkner, who an expert on bringing cases under the CROA, is testifying this afternoon on behalf of the National Association of Consumer Advocates, the National Consumer Law Center, U.S. PIRG, and Consumer Federation of America.   Joanne will suggest a number of improvements to CROA, including a clear ban on mandatory binding arbitration, distant forum, and class action waiver clauses, as well as a provision allowing for injunctive relief.  You can read her written testimony here.  The other witnesses are Lydia Parnes (Director of the Bureau of Consumer Protection, FTC),  Richard Johnson (AARP), Jerry Cerasale (lobbyist for the telemarketing industry), Robin Holland (lobbyist for Equifax), and Steve St. Clair (Iowa Attorney General's office).

Response to FTC Report on Relationship Between Credit Scores and Insurance Claims

We blogged yesterday on the FTC's report that found that (relatively low) consumer credit scores are predictors of auto insurance claims.  PIRG's consumer blog claims here, however, that the FTC study is flawed.  The PIRG post provides links to a major June 2007 National Consumer Law Center report on the topic and information on a congressional hearing to held tomorrow (Friday July 27).  The hearing is entitled "Credit-Based Insurance Scores: Are They Fair?"

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.

Split Ninth Circuit decision on FCRA's "reasonable reinvestigation" requirement

by Deepak Gupta

  Under the Fair Credit Reporting Act, when a consumer disputes an item on a credit report, the reporting agency is required to "conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate."   But last week, a conservative Ninth Circuit panel majority (Judges Bybee, of "torture memo" fame, and O'Scannlain) let the credit reporting agency Experian off the hook for failing to correct a credit report even after it received proof--in the form of a court document--demonstrating that the report was false.  Judge Kosinzki authored a spirited dissent.  Dennis v. BEH-1, LLC, No. 04-56230 (9th Cir. May 7, 2007).

As a result of a mistaken clerical notation, Jason Dennis's credit report said that a civil judgment had been entered against him in a dispute with his landlord.  But anyone who looked in the court file would have found a stipulation clearly stating that no judgment would be entered because the parties had actually settled their dispute; Dennis had paid his landlord and the case had been dropped.   Experian received a copy of the stipulation as a result of the reinvestigation.  Under these circumstances, said Judge Kozinski, the record supported the conclusion that Experian "made a deliberate decision not to amend [the] report or take further action, even after it obtained documentary proof that no judgment had been entered."

Judge Kozinski's dissent is the most interesting part of this otherwise pretty pedestrian decision, which ultimately doesn't stand for much.  His remarks about the importance of the FCRA's reinvestigation requirement are worth repeating here:

Sixth Circuit slashes punitives in FCRA case

by Deepak Gupta 

Yesterday, the Sixth Circuit issued an opinion slashing a jury's punitive damages award in a Fair Credit Reporting Act case.  Bach v. First Union Nat'l Bank, No. 06-3660 (6th Cir. May 15, 2007).  The jury had awarded an elderly widow $400,000 in actuals plus $2,628,600 in punitives against a bank.  The district court, after an initial appeal and remand, ordered reduction of the $2,628,600 to $2,228,600.  In the second appeal, the Sixth Circuit held that the district court's subtraction of $400,000, although it "eliminated any concern regarding the potential duplication of compensatory damages and ultimately achieved a lesser ratio, of 5.57," was still not good enough because that the bank's actions were not reprehensible enough to justify the large punitive award--the only reprehensibility factor was the vulnerability of the victim.   So this time the Sixth Circuit took matters into its own hands and ordered the district court to cut the award down to no more than $400,000--the same amount as the actuals.

Did Suze Orman's Fico Kit Violate the Credit Repair Organizations Act?

The Times reports here on a proposed settlement in a class action suit brought against Fair Isaac and Equifax which would prevent them from claiming that various credit products, including Suze Orman's Fico Kit (sold by Fair Isaac), will improve consumers' creditworthiness.  The suit was brought under the Credit Repair Organizations Act.  A quote from the story:  "Fair Isaac did not admit liability, but settled the matter by paying the trial lawyers’ expenses and providing three free months of credit-score tracking to anyone who bought products between Nov. 19, 1999, and Feb. 8, 2007." 

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.

Imperfect Competition in Auto Lending: Subjective Markup, Racial Disparity, and Class Action Litigation

Mark Cohen of Vanderbilt's working paper with the above title is available online at SSRN. The abstract is as follows:

While the market for auto lending at first appears to be highly competitive, many consumers lack the ability to obtain accurate information about price. In many markets, uninformed consumers can free ride off the knowledge of informed consumers. However, the market for auto lending differs from traditional markets because price ultimately depends upon both the credit worthiness of the individual borrower and the details of the auto loan (e.g. term length, payment-to-income ratio, etc.). Auto dealers in this market act as agents of both consumers (identifying suitable auto lenders for them) and auto lenders (identifying prospective borrowers).

Given the asymmetric information about prices facing consumers, this market has been characterized by a wide disparity in the prices paid by consumers. This disparity comes about through a mechanism whereby auto dealers are quoted a risk-based interest rate from the lender and are then authorized to subjectively mark up this rate and charge what the market will bear. While the majority of auto loans are written without any markup, some consumers are charged thousands of dollars in addition to the risk-based interest rate.  While charging different prices to different consumers is not illegal, one of the apparent consequences in auto lending is that minority consumers - African-Americans and Hispanics in particular - have systematically been charged a higher markup on auto loans than White borrowers. It is this fact - coupled with federal laws outlawing discrimination in credit markets - that led to a series of lawsuits against auto lending institutions.  This paper reviews the theory and evidence of subjective markups on auto loans and examines how class action litigation has changed the auto lending market.

More on Whether the Federal Government is a "Consumer Reporting Agency" Under the FCRA

by Jeff Sovern

On Wednesday I blogged about whether lenders who trolled for potential borrowers through a federal database containing the financial records of millions of student aid applicants might have violated the Fair Credit Reporting Act.  The answer depends in part on whether a government agency qualifies as a consumer reporting agency within the meaning of the FCRA.  Notwithstanding the statutory language which I referred to on Wednesday, some authority states that it does not.  In Ollestad v. Kelley, 573 F.2d 1109, 1110 (9th Cir. 1978), the Court wrote:

The district court concluded that the FCRA does not apply to records held by federal agencies and granted defendants' motion for summary judgment. That conclusion was proper in light of the plain language of the statute, the absence of evidence of Congressional intent to include federal agencies within the statutory definition of “consumer reporting agency,” and the Federal Trade Commission's interpretation of the statute.

But the case is easily distinguishable and the statements appear to be overbroad dicta.  The plaintiff in Ollestad had sought an injunction under the FCRA to obtain corrections in his FBI records.  After quoting the definition of a consumer reporting agency, the court wrote: "It cannot be contended seriously that agencies such as the F.B.I. compile information on persons, particularly on former employees as is the appellant, for the purpose of furnishing consumer reports to third parties."  In addition, in commenting on the legislative history, the Court explained that "Although the FCRA's legislative history is less than explicit, the tenor of remarks of members of Congress indicates that the statute is concerned with regulating practices in the credit reporting industry rather than with regulating the record-keeping functions of federal agencies."  The student loan database, by contrast, has to do with the credit industry.

Are Lenders Trolling a Federal Student Loan Database to Solicit Borrowers Violating the FCRA?

by Jeff Sovern

The Washington Post had a story on Sunday about fears that lenders are trolling for potential borrowers through a federal database that contains the financial records of millions of student aid applicants.  Today's New York Times reports that because of the concerns, the Education Department has temporarily cut off outside access to the database.  Federal rules reportedly prevent the use of the database for that purpose and the Department of Education has in the past revoked some IDs that grant access to the database.  I'm not familiar with the federal rules in question and I hadn't even heard of the database until these reports surfaced, but I can't help wondering if this practice would give rise to a claim under the Fair Credit Reporting Act. 

The FCRA limits access to consumer reports to certain permissible purposes as stated in 15 U.S.C. § 1681b.  Lenders are permitted to send solicitations if they comply with the prescreening rules but if those rules were not complied with, the lenders may have a problem.  It's hard to believe that the FCRA applies to a database maintained by the government, but on a quick look I can't find anything that says it doesn't.  The FCRA applies to "consumer reports" assembled by "consumer reporting agencies," as defined in § 1681a. The database reportedly was maintained at least in part to determine student eligibility for financial aid, which would seem to qualify its reports as consumer reports ("any written . . . or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity . . . .").  "Consumer reporting agency" is defined in part as "any person which for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information . . .."  It seems likely that that describes the federal database.  The word "person" is specifically defined as including any "government or governmental subdivision or agency, or other entity." 

Does anybody out there see something I'm missing?  Incidentally, obtaining information from a consumer reporting agency under false pretenses is a federal crime under § 1681q; gives rise to a private claim by consumers with $1,000 in statutory damages under § 1681n; and gives rise to a claim by the credit reporting agency.