Recently, the U.S. Court of Appeals for the Tenth Circuit affirmed in part and reversed in part a district court’s award of summary judgment to a mortgage servicer who provided a negative credit report after the borrower refinanced his home without notifying the closing agent that his servicing rights had been transferred. Llewellyn v. Allstate Home Loans, Inc., 711 F.3d 1173 (10th Cir. 2013). The district court granted summary judgment to the servicer and its foreclosure law firm after concluding that the borrower had failed to provide sufficient evidence of actual economic or emotional damages, or willfulness to support his FCRA claim. The Tenth Circuit affirmed the district court’s determination that the borrower had not provided evidence of economic damages or willfulness, but concluded that the evidence presented was sufficient to create a genuine issue of material fact about whether the borrower suffered emotional damages and reversed and remanded for further proceedings on that claim. In so doing, the court explained that borrowers can rely solely on their own testimony to establish emotional harm if they explain their injury in reasonable detail and do not rely on conclusory statements. The appellate court also affirmed the district court’s award of summary judgment in favor of the servicer on the borrower’s FDCPA claim, concluding that the servicer acquired the debt before it was in default, and thus did not qualify as a “debt collector” under the statute.
On May 7, the FTC released letters it sent to 10 data brokers warning that certain of the brokers’ practices could violate FCRA privacy protections. The announcement states that data broker companies that collect, distribute or sell information about consumers’ creditworthiness, eligibility for insurance, or suitability for employment are subject to FCRA, and as such, have an obligation to reasonably verify the identities of their customers and make sure that customers have a legitimate purpose for receiving consumer information. The letters were issued pursuant to an FTC “test-shopping” operation as part of an international privacy practice transparency sweep conducted by the Global Privacy Enforcement Network. The operation and subsequent warnings letters are the latest move by the FTC to address data broker compliance with FCRA. Last year, the FTC ordered certain data brokers to produce information about their collection and use of consumer data and announced at least one settlement with a data broker regarding FCRA compliance. However, the letters do not constitute an official notice that the companies are subject to FCRA or act as formal complaints, but rather “remind” the companies to review their practices to determine whether they are consumer reporting agencies subject to FCRA.
On April 22, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s order approving a $45M class action settlement under FCRA on the grounds that the conditional nature of the incentive award rendered the class representatives and class counsel inadequate representatives of the absent class members. Radcliffe v. Experian Info. Solutions Inc., 11-56376, 2013 WL 1715422 (9th Cir. Apr. 22, 2013). The plaintiffs alleged that the three major credit reporting agencies issued consumer credit reports containing negative entries for debts that were already discharged through bankruptcy. The parties reached a settlement in February 2009, whereby a $45M common fund would provide an award not to exceed $5,000 to each named plaintiff, while plaintiffs suffering actual damages would receive awards ranging from $150.00 to $750.00 and the remaining class members would each recover roughly $26.00. The Ninth Circuit held that the “incentive awards” provided to the named plaintiffs “corrupt the settlement by undermining the adequacy of the class representatives and class counsel,” while the conditional nature of the awards “removed a critical check on the fairness of the class-action settlement, which rests on the unbiased judgment of class representatives similarly situated to absent class members.” The court further held that class counsel would have been disqualified under this agreement because they have a fiduciary responsibility to represent the interests of the class as a whole, and conditional incentive rewards would require class counsel to represent class members with conflicting interests. The court explained that the disparity between the awards given to the named plaintiffs and the rest of the class “further exacerbated the conflict of interest caused by the conditional incentive awards.” The court concluded that the representative plaintiffs ultimately were unable to fairly and adequately protect the interests of the class, reversed the district court’s approval of the settlement, and remanded the case for further proceedings.
Federal Court Holds Credit Furnisher Must Show Proof of Investigation of Consumer Dispute under FCRA
On February 22, the U.S. District Court for the District of Arizona held that a furnisher of credit information must present evidence regarding its investigation of a consumer’s credit reporting dispute in order to satisfy the FCRA dispute resolution requirements. Modica v. Am. Suzuki Fin. Servs., No. CV11-02183-PHX, 2013 WL 656495 (D. Ariz. Feb. 22, 2013). The plaintiff leased a vehicle from the defendant and did not return it at the end of the lease term. The defendant reported the account as “current/paying as agreed” after the plaintiff returned the vehicle. The plaintiff disputed this charge to the credit bureaus which contacted the defendant to notify them of the dispute and confirm the charge. The defendant eventually changed the report to show an unpaid balance with a charge-off, prompting the plaintiff to bring suit alleging breach of contract, violation of a state law regarding credit reporting, and violation of FCRA. In denying the defendant’s motion for summary judgment as to the FCRA claim, the court noted that FCRA requires a furnisher of credit information to conduct a “reasonable investigation” upon receipt of a consumer dispute. The court found that the creditor did not engage in a reasonable investigation—the defendant was unable to explain discrepancies between what it submitted to the credit reporting agencies and a letter it submitted to the plaintiff which showed she had no past due payments. In fact, the defendant was unable to say what the credit investigation entailed, a fact that precluded its claim for summary judgment.
California Appeals Court Permits Borrowers’ Claims against Lender Based on Auto Dealer’s Alleged Breach of Installment Contract
On February 4, the California Court of Appeal, Third District, held the FTC’s Holder Rule allows borrowers to assert claims against a lender assignee that they might otherwise have against the auto dealer with whom the borrowers entered the installment contract. Lafferty v. Wells Fargo Bank, No. C0678812, 2013 WL 412900 (Cal. App. Ct. Feb. 4, 2013). The borrowers stopped making payments on their motor home, disclaimed their ownership interest, and filed suit against the dealer with whom they financed the purchase of the vehicle after the dealer refused to make repairs to the vehicle. Relying upon the FTC’s Holder Rule, which requires language in every consumer installment contract to state that any holder of the consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of the goods, the borrowers sued the bank to whom their loan had been assigned. After a trial court dismissed the case, the borrowers appealed. The appeals court reversed the judgment, holding that the “plain meaning of the Holder Rule allows the [borrowers] to assert claims against [the bank] they might otherwise have against [the dealer],” but limited the borrowers’ recovery to the actual amounts paid under the installment contract. The appeals court declined to follow courts in other jurisdictions that looked beyond the plain meaning of the rule to assess the FTC’s original intent in adopting the rule, and rejected the bank’s argument that the Reese-Levering Act limits the borrowers’ right to rescission of the contract. The appeals court also held that the borrowers stated causes of action against the bank under the CLRA and for negligence, but that their claim for negligent defamation of credit was preempted by the Fair Credit Reporting Act. The appeals court reversed the trial court order.
On December 6, the U.S. Court of Appeals for the Third Circuit held that a property reporting firm cannot be held liable for a willful violation of FCRA because the firm’s interpretation that it was not a consumer reporting agency subject to FCRA requirements was not unreasonable. Fuges v. Southwest Fin. Servs., Ltd., No 11-4504, 2012 WL 6051966 (3rd Cir. Dec. 6, 2012). The borrower filed a putative class action against a property reporting firm, alleging that the firm failed to comply with FCRA when it prepared a report requested by a bank in connection with the borrower’s credit application. On the reporting firm’s motion for summary judgment, the district court explained that the property report contained information about deeds, mortgages, parcel number and taxes, and lien information that more closely relate to a particular parcel of property than to a particular consumer, and that the report did not contain a social security number, payment history, previous addresses, or other information typically included in consumer credit reports. It held that no jury could find that the firm acted willfully because the firm’s reading of FCRA as not being applicable to property-reporting activities was not unreasonable, and granted summary judgment in favor of the firm. The appellate court agreed, holding that (i) the statute’s terms are ambiguous, (ii) the firm’s reading of the those terms has some foundation in the statutory text, and was therefore not objectively unreasonable, and (iii) there is no judicial or agency guidance that would suggest that the firm’s reading is contrary to the intended meaning of the provisions in question, and therefore the firm did not run a substantial risk in adopting its interpretation. Further, the court rejected the borrower’s argument that the reporting firm should lose the potential protection of the “reasonable interpretation” defense, because it never actually interpreted FCRA prior to the commencement of the suit. The court affirmed summary judgment in favor of the reporting firm.
On November 29, the CFPB issued a bulletin to nationwide specialty consumer reporting agencies (NSCRAs) reminding such firms of their obligation under FCRA to facilitate the process by which consumers may obtain a free annual consumer report. The CFPB also announced that its enforcement team issued warning letters to several NSCRAs that may be violating FCRA, based on reviews conducted under the CFPB’s new authority to examine certain CRAs. According to Bulletin 2012-09, the CFPB expects every NSCRA to (i) enable consumers to request a free annual consumer report by a toll-free telephone number that is published as specified, (ii) ensure that its streamlined process for obtaining a free annual consumer report has adequate capacity to accept requests, (iii) collect only as much personal information from a consumer requesting a free annual consumer report as is reasonably necessary to identify the consumer properly, (iv) provide clear and easily understandable information and instructions to consumers, (v) comply with Regulation V when using or disclosing personally identifiable information collected from a consumer in connection with the consumer’s request for any FCRA-required disclosure, and (vi) accept requests for free annual consumer reports from consumers who use methods other than the streamlined process or instruct such consumers on how to use the streamlined process. The sample warning letter released by the CFPB cites possible violations of the requirements outlined in the Bulletin and urges recipients to review practices and procedures to ensure compliance.
On October 10, the FTC announced that a major consumer reporting agency (CRA) agreed to settle charges that it improperly sold lists of consumers who were late on their mortgage payments. The CRA will pay $393,000 to resolve allegations that it violated the FTC Act by failing to implement procedures to prevent the sale of lists of consumer information to firms that should not have received them. In a separate but related case, which the DOJ pursued under a referral from the FTC, a data reseller and its affiliates settled charges that the companies violated the FTC Act and FCRA by (i) obtaining prescreened lists without having a permissible purpose, (ii) reselling the reports without disclosing to the consumer reporting agency that provided them who the end users would be, (iii) failing to maintain reasonable procedures to ensure that prospective users had a permissible purpose to get them, (iv) to the extent that firm offers of credit were made, failing to maintain a record of the criteria used to select consumers for these offers, and (v) failing to control access to sensitive consumer financial information. The resellers agreed to pay a $1.2 million civil penalty and will be barred from using or selling prescreened lists without a permissible purpose, or in connection with solicitations for debt relief or mortgage assistance relief products or services.
On October 10, Senator Rockefeller (D-WV), Chairman of the Senate Commerce Committee, sent letters to nine data brokers seeking information about how those companies compile and sell consumer information. For example, Mr. Rockefeller asked that, by November 2, 2012 the data brokers (i) provide a list of the sources from which the brokers have collected or received data from or about consumers over the past four years, (ii) describe the methods of data collection employed, (iii) identify the consumer data collected during that period, and (iv) list the products or services offered to third parties. This follows similar requests made in August by a bipartisan group of members of the House of Representatives. Because the data brokers targeted by members of the respective chambers of Congress overlap only in part, a total of fourteen companies have been asked to produce information and materials to Congress.
On October 1, the CFPB announced a coordinated enforcement action taken by federal regulators against a major credit card company and several of its subsidiaries alleged to have violated multiple consumer financial protection laws. According to the CFPB, the investigations conducted by it and other federal regulators and a state regulator revealed that the companies (i) charged illegal late fees, (ii) discriminated on the basis of age in the offering of credit, (iii) engaged in deceptive marketing, and (iv) failed to properly report consumer credit disputes. To resolve the allegations, the companies agreed to enter into several different consent orders. Two orders obtained by the CFPB and a joint CFPB/FDIC order require three of the subsidiaries collectively to refund approximately $85 million to approximately 250,000 customers and pay a cumulative $18 million in civil money penalties. Likewise, the OCC issued a consent order that includes an additional $500,000 penalty, and provides for restitution that overlaps with the broader restitution ordered by the CFPB. Finally, an order obtained by the Federal Reserve Board, requires the company, and certain of its subsidiaries, to pay an additional $9 million penalty. Furthermore, pursuant to the various orders, the companies agreed to undergo an independent audit and implement enhanced compliance systems to address the alleged illegal practices. This is the third public CFPB-led enforcement action aimed at credit card companies, and the first to go beyond allegations regarding ancillary products and resolve alleged violations of the CARD Act, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act.
On September 27, the U.S. Court of Appeals for the Sixth Circuit revived an individual’s private action under FCRA against a bank, alleging that the bank failed to adequately investigate and respond to notices it received from several consumer reporting agencies regarding disputed car loan. Boggio v. USAA Fed. Savings Bank, No 11-4040, slip op. (6th Cir. Sep. 27, 2012). After experiencing credit problems caused by his ex-wife’s failure to make payments on a car she purchased during their marriage by signing both of their names to a check, the plaintiff wrote to several consumer reporting agencies to dispute his responsibility for the loan in light of the forgery, as well as the parties’ separation and divorce agreements that stated the ex-wife would be responsible for the car payments. The plaintiff alleges that the reporting agencies notified the bank of the dispute, which the bank refused to investigate without a police report or fraud affidavit from the plaintiff, as required by the bank’s fraud policy. The district court granted summary judgment in favor of the bank, holding that the bank reasonably investigated the notices it received from credit reporting agencies, and that the plaintiff had ratified the debt. On appeal, the circuit court reversed and remanded the district court’s decision, holding that there is a genuine dispute of material fact with regard to the sufficiency of the bank’s investigation. The court added that the plaintiff’s failure to comply with the bank’s fraud policy does not alter its finding of a genuine dispute of material fact, holding that FCRA does not permit the bank to require independent confirmation of the reporting agencies’ notices before conducting an investigation. The court also held that the dispute over ratification requires resolution by a trier of fact given the ambiguity of the separation agreement, among other issues.
On August 7, the U.S. Court of Appeals for the Ninth Circuit revived a consumer’s suit against his bank and a consumer reporting agency (CRA) in which he alleges that the bank and CRA violated FCRA in connection with a fraudulent account opened in the consumer’s name. Drew v. Equifax Info. Servs. LLC, No. 11-15008, 2012 WL 3186110 (9th Cir. Aug. 7, 2012). The consumer claims that though his account was actually fraudulent, the bank reported it as lost or stolen. He alleges the bank violated FCRA when, after receiving a “fraud block notification” from the CRA, the bank (i) failed to conduct a sufficient investigation, (ii) continued to report the fraudulent account as belonging to the consumer, and (iii) reported the fraudster’s address as the consumer’s address. The district court granted summary judgment on these claims in favor of the bank and granted summary judgment to the CRA based on its argument that the consumer’s claims exceeded the statute of limitations. The appeals court agreed that the bank’s investigation was legally sufficient, but held that material issues of fact remained with regard to the consumer’s other claims. The court reasoned that a jury could find (i) that reporting a fraudulently opened account as a lost or stolen account belonging to the consumer was untrue or facially inaccurate in violation of FCRA and (ii) that reporting the fraudster’s address as the consumer’s address violated FCRA’s requirement to correct inaccurate information. The court also found that the consumer presented evidence of emotional distress sufficient to allege emotional damages, and that such damages are cognizable under FCRA. Finally, the court held that facts regarding the timing of the consumer’s knowledge remain in dispute and overturned the district court’s holding that the consumer’s suit exceeded the statute of limitations.
On July 30, the U.S. Court of Appeals for the Tenth Circuit overturned a district court ruling that would have required borrowers seeking rescission under TILA to state their ability to repay in the initial complaint. Sanders v. Mountain Am. Fed. Credit Union, No. 11-4008, 2012 WL 3064741 (10th Cir. Jul. 30, 2012). The borrowers timely sued to compel rescission of their mortgage loan, claiming that the lender failed to provide disclosures required under TILA. The district court held that the borrowers were not entitled to rescission because they failed to plead their ability to repay. On appeal the court held that, while TILA recognizes that a court may entertain a creditor’s petition for an order equitably modifying the rescission procedure, in this case the district court impermissibly altered that procedure and created a pleading standard that would require all borrowers seeking TILA rescission to plead their ability to repay. The court reasoned that such a standard would add a condition not supported by TILA or Regulation Z, and that categorical relief is outside of the district court’s equitable powers. However, the court maintained that a district court still may use its equitable powers to protect a creditor’s interest during the rescission process. The appellate court also reversed the district court’s dismissal of the borrowers’ ECOA claim related to a separate refinance transaction because the district court made factual assumptions about the refinance process in violation of its obligation to draw all reasonable inferences in favor of the plaintiff borrowers. While the TILA and ECOA claims were remanded for further proceedings, the court upheld the district court’s dismissal of the borrowers’ claims that the lender also violated FCRA when it reported false information to consumer reporting agencies, holding that FCRA does not provide a private right of action against the furnisher of credit information.
On June 12, the FTC announced that a data broker agreed to settle charges that it marketed and sold consumer profiles to companies engaged in human resources, background screening, and recruiting without taking steps to protect consumer information as required by FCRA. The FTC claimed that the data broker operated as a consumer reporting agency and violated FCRA when it failed to ensure that the information it compiled and sold would be used only for permissible purposes. The broker also allegedly failed to ensure that consumer information it sold was accurate and failed to inform buyers of their FCRA obligations. Among other things, the settlement requires the data broker to pay an $800,000 civil penalty and prohibits the firm from any future violations of FCRA.
D.C. Federal Court Holds FCRA Credit Report Notice Requirements Apply to Auto Dealers Engaging in Third Party Financing Transactions
On May 22, the U.S. District Court for the District of Columbia rejected the National Automobile Dealer’s Association’s (NADA) challenge to an FTC determination that an automobile dealer that executes a credit contract based on a third party financing source “uses a consumer report” under FCRA, and, thus, must provide prospective buyers with a “risk-based pricing notice.” National Automobile Dealers Assoc. v. Federal Trade Commission, No. 11-cv-01711, 2012 WL 1854088 (D.D.C. May 22, 2012). A “risk-based pricing notice” must be provided to buyers who, based upon information contained in their consumer reports, are offered credit at terms “materially less favorable than the most favorable terms available to a substantial proportion of consumers.” The notice is intended to alert buyers to the existence of negative information in their credit reports to enable them to correct any inaccuracies. The FTC’s 2011 amendments to the Fair Credit Risk-Based Pricing Regulations clarified that even in the context of a third-party transaction—where the auto dealer is not the ultimate source of financing and does not physically obtain a consumer’s credit report—the auto dealer must provide a risk-based pricing notification. According to NADA, the FTC’s interpretation placed an unreasonable burden on auto dealers who outsource financing to banks or other entities. NADA also argued that the interpretation was arbitrary and capricious and that it was not entitled to Chevron deference. In its ruling, the court rejected these challenges, stating, among other things, that the FTC’s determination was “eminently reasonable” and consistent with the overall regulatory scheme of FCRA because auto dealers are able to obtain credit report information and are best suited to convey that information to consumers. NADA intends to appeal the decision.