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FCA Exam Manual EM-615 Consumer Protection - Fair Credit Reporting

Authority and Purpose


The Fair Credit Reporting Act (FCRA) became effective April 25, 1971. FCRA is designed primarily to regulate the consumer reporting industry, to place disclosure obligations on users of consumer reports, and to ensure fair, timely, and accurate reporting of credit information. The FCRA imposes disclosure obligations on users of consumer reports to allow applicants to correct erroneous credit reports.

Applicability and Exemptions

The FCRA does not apply in connection with business credit transactions, including the agricultural credit transactions typically engaged in by Farm Credit System (System) institutions. Rather, it applies to information obtained primarily for purposes of consumer lending and other consumer transactions. Thus, the consumer report user obligations of FCRA apply to System institutions only with respect to credit transactions for personal, family, or household purposes. The obligation of System institutions to comply with FCRA for consumer credit transactions is reflected in FCA Regulation 12 CFR § 618.8320.

The FCRA also imposes a number of FCRA reporting, notice, and compliance obligations on consumer reporting agencies, which compile, maintain, and disseminate consumer information. It is unlikely, however, that System institutions would be deemed consumer reporting agencies under FCRA. FCA Regulation 12 CFR § 618.8320 generally restricts the use of data regarding borrowers and loan applicants. In addition, FCRA permits unrestricted reporting of a business' own experience with a consumer, such as loan payment history, etc., so System institutions could share such information with each other and outside organizations in accordance with FCA Regulation 12 CFR § 618.8320 without becoming consumer reporting agencies.

If, through its consumer lending activities, a System institution qualifies as a user of consumer reports, it must comply with § 615 of the FCRA. Section 615 of the FCRA requires that whenever a creditor reduces or denies the amount of, or increases the cost of, credit, either wholly or partly, because of information contained in a consumer report, this must be disclosed to the consumer. A statement, preferably in writing, that information in the report caused or contributed to the denial or increase in cost, and the name and address of the reporting agency must be given to the consumer. If the information is from a source other than a reporting agency, the creditor must inform the applicant of the applicant's right to make a written request for the information when the denial is made known to the applicant. If the applicant requests the information within 60 days after being notified of the adverse action, the creditor must disclose the nature of the information to the applicant.

Examination Objectives

Determine whether the institution makes the disclosures required of users of consumer reports when adverse action is based wholly or partly on information obtained from outside sources; and determine whether the institution's activities make it subject to the consumer reporting agency requirements of the FCRA and, if so, ensure it is in compliance with those requirements.

Examination Procedures

The following procedures are provided to facilitate an evaluation of an institution's compliance with the FCRA. Consistent with risk-based examination principles, examiners should add, delete, or modify procedures based on the particular circumstances of the institution.

1. Coordinate compliance examination activities with other members of the examination team and the examiner-in-charge (EIC). Emphasis should be on identifying violations of law and regulation in other areas (e.g., eligibility, scope of financing, lending limits, etc.); integrating those findings with the examination of consumer protection, borrower rights, and financial reporting; and concluding on management's compliance with laws and regulations.

2. Review and evaluate the adequacy of policies, procedures, and internal controls to ensure compliance with the requirements of the FCRA.

3. Discuss with management the institution's activities related to collecting, reporting, supplying, and using credit information and determine whether:

a. The institution uses credit information obtained from credit bureaus or other outside sources in evaluating consumer credit applications; and

b. The institution's activities make it subject to the consumer reporting agency requirements of the FCRA.

4. If the institution uses information from credit bureaus or other outside sources in evaluating consumer credit applications, coordinate the testing for compliance with the testing of rejected applications and determine that the institution makes the disclosures required by FCRA of users of credit information.

5. If the institution qualifies as a consumer reporting agency, determine that it is in compliance with the requirements of Sections 604 through 614 of the FCRA.

6. Conclude whether the institution is adequately complying with the FCRA. If not, ascertain whether the conclusion of noncompliance is supported by adequate documentation of the specific noncompliance.

7. Utilize discussions with institution managers as needed to gather information and discuss procedures and practices followed by institution personnel to ensure compliance with laws and regulations.

8. Discuss tentative conclusions and examination findings with the examiner(s) responsible for evaluating management.

9. Discuss items of concern, scope of work performed, and conclusions with the EIC and with the appropriate institution manager. Obtain a response regarding the cause(s) of deficiencies or weaknesses and anticipated corrective actions.

10. Organize and compile, if necessary, violations of law and regulation into an appendix for the Report of Examination.

11. Prepare a leadsheet or other summary document to provide workpaper support for the work performed and the conclusions reached.

Consequences of Noncompliance

Any consumer reporting agency or user of information which willfully fails to comply, or is negligent in failing to comply, with any requirement imposed under the FCRA with respect to any consumer is liable to that consumer in an amount equal to the sum of:

* Any actual damages sustained by the consumer as a result of the failure (willful or negligent noncompliance);
* Such amount of punitive damages as the court may allow (willful noncompliance only); and
* In the case of any successful action to enforce any liability under FCRA, the costs of the action together with reasonable attorney's fees as determined by the court (willful and negligent noncompliance).

Sedgwick*-*Publications & Presentations*-*U.S. Supreme Court Interprets 'Willful' Noncompliance and

Publications
U.S. Supreme Court Interprets 'Willful' Noncompliance and
News Flash
July 2007
By: Stephanie Sheridan, Michael Westheimer, Kelly Savage

Long-awaited ruling has impact beyond the insurance sector on hundreds of pending consumer class action cases across the country by shedding light on what standards apply in determining penalties

Consumer class actions are an ongoing trend. As companies that use consumer credit information for business purposes are aware, various federal and state laws regulate how such information may be used. One such statute, the federal Fair Credit Reporting Act (FCRA), permits consumers to seek remedies against companies that willfully violate its provisions, including statutory penalties of $100 to $1,000 (which plaintiffs allege should be awarded to each consumer on a per-violation basis), as well as other remedies. In a recent U.S. Supreme Court decision, Safeco Ins. Co of America v. Burr, 127 S.Ct. 2201 (issued June 4, 2007), the Court provided much-needed guidance on what constitutes a "willful" violation under FCRA. The Court also interpreted what constitutes an "adverse action" (requiring notice) in connection with the initial purchase of insurance.

The Safeco/GEICO case involved two actions: Safeco Ins. Co of America v. Burr, and GEICO Gen. Ins. Co. v. Edo. In both cases, plaintiffs sued under provisions of FCRA that require insurers to provide notice to consumers if "adverse action" (such as an increase in charge for an insurance policy) is taken as a result of information obtained from a consumer report. Plaintiffs sought to represent nationwide classes of consumers, alleging the insurers willfully violated FCRA by not sending adverse action notices to applicants whose initial insurance rates were higher than they would have received if they had perfect credit. In both cases, the Supreme Court reversed the U.S. Court of Appeals for the Ninth Circuit and affirmed judgments entered in favor of the insurers.

'Adverse Action' in Initial Purchase of Insurance

In defending the litigation, Safeco contended that an initial insurance rate cannot be considered an adverse action because no prior rate was in place that was increased. GEICO more narrowly contended that its initial rates were no higher than they would have been if the applicant's credit information had not been considered (and a "neutral score rate" was used instead), so there was no adverse action even though the plaintiffs did not receive the lowest possible rate. In Safeco/GEICO, the Court rejected Safeco's position and held that an initial insurance rate may give rise to an adverse action under FCRA. However, the Court accepted GEICO's position that the proper initial baseline rate for determining existence of adverse action is the rate that would have been imposed if the applicant's credit information had not been considered (i.e., the neutral-score rate).

The Court held that GEICO's conduct was not adverse action, so its lack of notification did not violate FCRA. As for Safeco, the Court held that the company's lack of notification may have violated FCRA but plaintiffs still were not entitled to recover statutory penalties because any such violation was not "willful." In a broad and potentially far-reaching holding, the Court resolved a split among federal circuits and set a uniform standard for "willful" noncompliance with FCRA.

'Willful' Noncompliance with FCRA

Prior to Safeco/GEICO, some circuits had held that willfulness required a knowing violation, while others (including the Ninth Circuit) held that willfulness could be established through reckless disregard of the law. The Safeco/GEICO Court agreed with the Ninth Circuit that "willfully" failing to comply includes "reckless" violations of the FCRA. However, the Court adopted a narrow definition of "reckless" and reversed the Ninth Circuit's holding that Safeco had willfully violated the statute. Specifically, the Court held that recklessness involves "conduct violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known." To be liable for willful violation of FCRA, a company must be more than "merely careless."

Applying this standard, the Court concluded that Safeco did not "willfully" violate FCRA. Although the Court disagreed with Safeco's reading of the statute, it recognized that Safeco's reading had a foundation in the statutory text. The Court observed that Safeco did not have the benefit of any case law nor any guidance from FCRA's regulatory agency (the Federal Trade Commission) interpreting the provision at issue. Thus, the Court held that Safeco's reading was not objectively unreasonable and fell well short of the "unjustifiably high risk" necessary for reckless liability.

Implications for Other Industries

Safeco/GEICO's holding as to what constitutes a willful violation of FCRA is potentially applicable to other types of consumer actions under FCRA. For example, hundreds of consumer class actions have been filed within the past several months under a provision of FCRA, titled the Fair and Accurate Credit Transactions Act or FACTA, alleging that retailers printed credit or debit card expiration dates on receipts provided to consumers at the point of sale. As another example, hundreds more consumer class actions have been filed (chiefly in the Northern District of Illinois) alleging that creditors sent prescreened solicitations to prospective borrowers that did not constitute firm offers of credit.

The extent to which Safeco/GEICO's willfulness holding may be applicable to other types of FCRA violations is not yet clear. Although the holding is stated in general terms, the Court was careful to note that "there is no need to pinpoint the negligence/recklessness line," because in that particular case, Safeco's reading of the statute was not objectively unreasonable. The Court also declined to rule on whether good faith reliance on legal counsel would render a company immune from liability for willful violation of FCRA.

The Safeco/GEICO opinion may not do much to stem the tide of consumer class action litigation in light of the Court's adoption of reckless disregard as a basis for establishing willful violation of FCRA. On the other hand, Safeco/GEICO's high bar for proving recklessness gives rise to a variety of arguments that may assist companies in defending this type of litigation.

Practitioners make sense of ‘willful noncompliance’ under FCRA

Nelson Mullins | Supreme Court hears oral arguments on what constitutes adverse action, willful noncompliance under FCRA

15 U.S.C. §§ 1681n and 1681o – Civil liability for Willful and Negligent Noncompliance: Statutory Language of the FCRA (Fair Credit Reporting Act) for Class Action Defense Attorneys - Class Action Defense Blog

Pay VERY close attention to the part I bolded and underlined.

15 U.S.C. §§ 1681n and 1681o – Civil liability for Willful and Negligent Noncompliance: Statutory Language of the FCRA (Fair Credit Reporting Act) for Class Action Defense Attorneys

As a resource for defense attorneys who defend against class action under the Fair Credit Reporting Act (FDCPA), 15 U.S.C. § 1681 et seq., we provide the text of the FCRA. The article sets forth the statutory provisions covering statutory liability for willful and negligent noncompliance with FCRA, which is contained in Section 1681n and 1681o, respectively:

§ 1681n. Civil liability for willful noncompliance

(a) In general.

Any person who willfully fails to comply with any requirement imposed under this title with respect to any consumer is liable to that consumer in an amount equal to the sum of

(1) (A) any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000; or

(B) in the case of liability of a natural person for obtaining a consumer report under false pretenses or knowingly without a permissible purpose, actual damages sustained by the consumer as a result of the failure or $1,000, whichever is greater;

(2) such amount of punitive damages as the court may allow; and

(3) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney' s fees as determined by the court.

(b) Civil liability for knowing noncompliance.

Any person who obtains a consumer report from a consumer reporting agency under false pretenses or knowingly without a permissible purpose shall be liable to the consumer reporting agency for actual damages sustained by the consumer reporting agency or $1,000, whichever is greater.

(c) Attorney's fees.

Upon a finding by the court that an unsuccessful pleading, motion, or other paper filed in connection with an action under this section was filed in bad faith or for purposes of harassment, the court shall award to the prevailing party attorney' s fees reasonable in relation to the work expended in responding to the pleading, motion, or other paper.

§ 1681o. Civil liability for negligent noncompliance

(a) In general.

Any person who is negligent in failing to comply with any requirement imposed under this title with respect to any consumer is liable to that consumer in an amount equal to the sum of

(1) any actual damages sustained by the consumer as a result of the failure; and

(2) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney' s fees as determined by the court.

(b) Attorney's fees.

On a finding by the court that an unsuccessful pleading, motion, or other paper filed in connection with an action under this section was filed in bad faith or for purposes of harassment, the court shall award to the prevailing party attorney' s fees reasonable in relation to the work expended in responding to the pleading, motion, or other paper.

Do a Google search on the terms "fcra willful non-compliance" sans quotes.