__________________________________________________________

DIGEST OF FCRA CASES 2005

__________________________________________________________ 5th Annual ACI Seminar on Consumer Finance Litigation & Class Actions NYC September 26-27, 2005

Frank A. Hirsch, Jr. NELSON MULLINS

GlenLake One, 2nd Floor 4140 Parklake Avenue Raleigh, NC 27612 Telephone: 919-329-3853 Fax: 919-329-3898 Email: frank.hirsch@nelsonmullins.com www.nelsonmullins.com

Atlanta Charleston Charlotte Columbia Greenville Myrtle Beach Raleigh Winston-Salem Washington, DC

1. THE FCRA TEMPORAL PREEMPTION DOCTRINE CUTS OFF STATE LAW CLAIMS FOR ALLEGED HARM AFTER NOTICE TO FURNISHERS Kane v. Guaranty Residential Lending, Inc., 2005 U.S. Dist. LEXIS 17052, No. 04-CV-4847 (E.D.N.Y. 05/16/05) Ryder v. Washington Mutual Bank, N.A., 371 F. Supp. 2d 152 (D. Conn. 2005) Many FCRA plaintiffs allege that they immediately and repeatedly alerted a furnisher about a credit reporting error, and contend the furnisher did not investigate and correct the error. A number of courts apply a temporal approach to FCRA preemption of state law tort claims. State law claims based on conduct that occurred after the furnisher received notice of disputed credit information are totally preempted by FCRA, regardless of whether the furnisher acted with malice or willfulness. The only state law claims permitted must address harm that occurs before notice to the furnisher. Defendants can often dismiss state law claims on this theory of temporal preemption. In Kane, consumers sued Guaranty Residential Lending (GRL) for defamation and negligence based on the companys erroneous reporting that they had made late payments on their mortgage, and for not correcting the error in a timely manner: Here, plaintiffs have stated that, after GRL initially furnished inaccurate information, plaintiffs immediately notified defendant that they were not in default, and repeatedly notified GRL of the alleged inaccuracies directly and through counsel. The Eastern District of New York explained the preemption consequences of these allegations: It would appear, then, that the vast majority of the defendants actions about which plaintiffs complain occurred after GRL had received notice of the inaccuracies. Any state law claims which plaintiffs might bring based on these actions are preempted by [FCRA] Section 1681t(b)(1)(F). Similarly, in Ryder, the plaintiff sued Washington Mutual Bank (WMB) for defamation and for violation of the Connecticut Unfair Trade Practices Act (CUTPA) based on the banks erroneous reporting of negative information regarding Ryders payments on a promissory note. The District of Connecticut dismissed the state law claims: The allegations set forth in the complaintindicate that WMB had notice from Ryder of the inaccuracies during virtually the entire chain of events. WMBs publication of inaccurate information that could give rise to a defamation or CUTPA claim must have taken place after WMB had notice of Ryders dispute and must therefore be preempted by [FCRA] Section 1681t(b). Determining whether plaintiffs can proceed with any common law claims requires examining the two overlapping and potentially contradictory FCRA preemption provisions -Sections 1681t(b)(1)(F) and 1681h(e). Section 1681h(e) provides that no consumer may bring any action or proceeding in the nature of defamation, invasion of privacy, or negligence with respect to the reporting of information against any consumer reporting agencyexcept as to false information furnished with malice or willful intent to injure such customer. Whereas, Section 1681t(b)(1)(F) appears to preempt all common law claims by providing that [n]o requirement or prohibition may be imposed under the laws of any Statewith respect to any subject matter regulated underSection 1681s-2, relating to the responsibilities of persons who furnish information to consumer reporting agencies.

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Courts have struggled to reconcile the FCRA provisions because the latter appears to grant absolute immunity to furnishers and the former appears to grant only qualified immunity. Under the temporal approach to FCRA preemption, state law claims based on actions of a furnisher of information after the furnisher has received notice of inaccuracies are held preempted by 1681t(b)(1)(F), while actions taken before notice has been received may not be preempted. The triggering notice event need not be from a CRA; the notice may come from a CRA or it may come from the consumer himself. In Kane, all potential state law claims were preempted by FCRA Section 1681t(b)(1)(F) because the Kanes alleged that all Guaranty Lifes actions were taken with notice that the credit information it was reporting was inaccurate. Even if improper conduct had occurred before receipt of notice, the Kanes failed to plead malice or willfulness to come within the preemption exception. Ryder was a similar situation in terms of timing all of the acts Ryder complained of took place after Washington Mutual had notice. Therefore, FCRA Section 1681t(b)(1)(F) preempted all of Ryders state law claims. 2. A FURNISHERS FAILURE TO INVESTIGATE FOR IDENTITY THEFT MAY BE REASONABLE IF THE CONSUMER DOES NOT TELL THE FURNISHER OF IDENTITY THEFT Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005) FCRA Section 1681s-2(b) requires furnishers of credit information to conduct a reasonable investigation after learning that a consumer disputes information that the furnisher has reported. However, what constitutes a reasonable investigation depends on what information is conveyed to the furnisher about the dispute. If the dispute is based on a consumers claim that she was the victim of identity theft, and this identity theft is not conveyed to the furnisher, then the furnisher is not liable under FCRA for verifying the debt without investigating the possibility of identity theft. Credit Control filed a motion for summary judgment, which was granted by the District Court. Westra appealed. The 7th Circuit affirmed. Identity theft can be hard to spot and it may not be obvious. In Westra, the identity thief incurred a debt to Pasco Emergency Medical Services, a company located in Florida. Westra had never resided in Florida and had never sought medical attention from Pasco. Pasco retained Credit Control to collect the debt, and Credit Control reported the delinquent account to Trans Union. When Westra noticed the delinquent Pasco account on his credit report, he mailed a dispute letter to Trans Union (TU) to inform TU that the account did not belong to him. This letter included a fraud statement and information about the perpetrator of the identity theft. The identity theft detail never made it to Credit Control as the furnisher. Instead, TU sent a Consumer Dispute Verification (CDV) form to Credit Control to request an investigation of the disputed account. The CDV did not make any reference to fraud or identity theft and did not include the documentation that Westra had provided. Credit

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Control verified the account information as accurate and reported back that the account belonged to Westra. A subsequent TU credit report received by Westra still contained the Credit Control account. Westra then sent a second dispute letter to TU and sent a letter directly to Credit Control. TU again contacted Credit Control about the account, this time specifically indicating that the dispute was whether the account was fraudulent. Based on this new information, Credit Control ordered a deletion of the fraudulent account. Westra sued Credit Control as the furnisher alleging an unreasonable investigation process. Despite the error, Credit Controls investigation was held reasonable given the scant information it received regarding the nature of Westras dispute. The 7th Circuit explained: Credit Control received a CDV from Trans Union [which] did not provide any information about possible fraud or identity theft or include any of the documentation provided to Trans Union by Westra. The original CDV provided to Credit Control did not provide any information about possible fraud or identity theft or include any of the documentation provided to TU. Had TU given Credit Control actual notice that the nature of the dispute concerned fraud, then perhaps a more thorough investigation would have been warranted. Westra argued that Credit Control should have contacted him directly about the disputed account. The court disagreed. Requiring a furnisher to contact a consumer concerning every credit dispute would be terribly inefficient and such action is not mandated by the FCRA, the 7th Circuit stated. 3. FCRA FEE AWARDS MAY BE LIMITED OR REDUCED FOR NEGLIGENT INFRACTIONS IF A PLAINTIFF REFUSES TO SETTLE Kirkpatrick v. Equifax Information Services, LLC, Nos. 02-1197-MO & 03-199-MO (D. Or. 05-23-05) When a credit reporting agency concedes a negligent violation of FCRA and offers to settle, consumers and their attorneys must consider the potential effect on the fee award request if they decide to go to trial. It might be tempting to reject the offer and proceed to trial in hopes of obtaining a punitive damages award for a willful FCRA violation. However, if the consumer fails to prove a willful violation and gets no punitive damages at trial, then the court can question whether the consumer actually achieved a victory when considering the consumers application for an additional award of his attorneys fees. Michael Kirkpatrick won a $210,000 jury verdict against Equifax. The plaintiff asked for $302,650 in attorneys fees. The court questioned whether Kirkpatrick had really won at trial given that the fees significantly exceeded the reward. Equifax had essentially conceded a negligent violation of the FCRA during discovery and had offered to settle for $110,000, plus $135,000 in attorneys fees. At trial, Kirkpatrick failed to prove a willful FCRA violation so why should a plaintiff be paid another $167,650 in fees (302,650 135,000) for requiring the court system to determine his claim? The Oregon District Court explained: This case was largely about punitive damages since liability for negligence was virtually acknowledged by the defendant. In reality, the

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plaintiff achieved limited success at trial, so the court awarded only $195,000 in attorneys fees. This reflected a reduction of over $107,000 from the fee request. 4. FCRA PREEMPTS STATE LAW DEFAMATION AND PRIVACY CLAIMS ABSENT CRA MALICE OR INTENT TO INJURE Nelski v. Trans Union, LLC, 2005 U.S. Dist. LEXIS 504, No. 249868 (Mich. Ct. App. 02/17/05, unpublished). The only way for a consumer to sue a CRA for negligently (but not maliciously) providing inaccurate credit information is under FCRA. FCRA expressly preempts defamation, invasion of privacy, and all other state law negligence claims against a CRA unless the agency provided false information about the consumer with malice or with an intent to injure. The plaintiff, Nelski, sued Trans Union in Michigan state court for defamation and for violating FCRA. She alleged that Trans Union negligently supplied inaccurate credit information about her to third parties. Trans Union removed the case to federal court. The District Court dismissed Nelskis FCRA claim because it found that Trans Union did not act negligently. The court declined to exercise jurisdiction over Nelskis other claim for defamation and dismissed it. Thereafter, Nelski refiled her defamation claim in state court. Trans Union moved to dismiss the claim, arguing that it too was preempted by FCRA. Trans Union also argued for issue preclusion -- that the District Courts ruling that Trans Union was not negligent collaterally estopped Nelski from relitigating that issue in state court in connection with her defamation claim. The Michigan trial court denied Trans Unions motion. The Michigan Court of Appeals reversed and dismissed Nelskis defamation claim. FCRA Section 1681h(e) provides that no consumer may bring any action or proceeding in the nature of defamation, invasion of privacy, or negligence with respect to the reporting of information against any consumer reporting agencybased in whole or part on the report except as to false information furnished with malice or willful intent to injure such consumer. Based on this language, the Michigan Court of Appeals held that Nelskis defamation claim was preempted. Nelski presented no proof that the wrongful reporting of her credit information was the result of malice or intentional conduct on the part of Trans Union. The court also agreed with Trans Union that the District Courts ruling collaterally estopped Nelski from, in essence, relitigating the negligence issue in state court.

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5. PERMISSIBLE PURPOSES: INTERFAMILY BUSINESS TRANSACTIONS MIGHT JUSTIFY ACCESS TO A CREDIT REPORT Breese v. TRIADvantage Credit Services, Inc., et al., 2005 U.S. Dist. LEXIS 1840, No. Civ. 03-3098 (D. Minn. 02/02/05). Section 604(3)(E)-6 of FCRA regulations provides that [a]n agent of a party with a permissible purpose may obtain a consumer report on behalf of his principal. Jennifer Pederson sued her brother, Michael Breese, for violating FCRA by using his position with TRIADvantage Credit Services to gain access to her credit report without her permission. Breese accessed Pedersons credit report at the request of their grandfather, Theodore White, who had cosigned a car loan for Pederson. The District Court of Minnesota ruled that Breese, acting as Whites agent, accessed Pedersons credit report for a permissible purpose under FCRA -- that is -- to see if Pederson was ruining Whites credit record. FCRA Section 1681b(a)(3)(F)(i) authorizes a credit agency to furnish a report to a person if it has reason to believe the person has a legitimate business need for the informationin connection with a business transaction that is initiated by the consumer. This was not a situation where White merely suspected Pederson of wrongdoing; his credit report revealed derogatory marks related to Pedersons activity. The court found that Pedersons purchase of a car using Whites good credit qualified as a business transaction initiated by the consumer. White had a legitimate business need to access Pedersons credit report because he had reliable evidence that Pedersons late payments on the car loan were damaging his credit. In addition, it appeared that Pederson had improperly obtained a credit card in Whites name. White also had a legitimate business need to determine if her defaults on the car loan and charges on the credit card were the cause of his reduced credit score. 6. WOULD-BE BUSINESS LOAN GUARANTORS ARE NOT PROTECTED BY FCRA Lucchesi v. Experian Information Solutions, Inc., 226 F.R.D. 172 (S.D.N.Y. 2005) A consumer who initiates a credit transaction as a business loan guarantor cannot sue under FCRA if a CRA provides an inaccurate report about him. FCRA does not apply to consumer reports issued in connection with applications for business financing: A report on a consumer for credit or insurance in connection with a business operated by the consumer is not a consumer report, and [FCRA] does not apply to it, explained the Southern District of New York opinion. [T]he object of FCRA is to regulate credit reports used in establishing eligibility for [transactions for] personal, family or household purposes. The plaintiff, Lucchesi, sued Experian for providing Fleet Bank and the Bank of New York with credit reports containing inaccurate information about him. Lucchesi had applied to the banks to act as guarantor for equipment loans for his moving company. Experian successfully moved to dismiss Lucchesis suit.

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7. REASONABLE SAFEGUARDS: CRA NOT LIABLE FOR BANKS ERRONEOUS REPORTS OF COUPLES DEATH Anderson, et al. v. Trans Union, LLC, et al., 367 F. Supp. 2d 1225 (W.D. Wis. 2005) FCRA requires that CRAs maintain only reasonable, not perfect, procedures for ensuring they provide accurate information about consumers. Certain CRA procedures are reasonable as a matter of law when all the material facts are known to the court such that summary judgment for the CRA is proper under FCRA. The Western District of Wisconsin granted Trans Unions (TU) motion for summary judgment, thereby disposing of the Andersons claim that TU violated Section 1681i(a) of FCRA by failing to conduct proper reinvestigations into the Andersons complaint. TU met its statutory obligations because the error resulted from failures by the Andersons credit card issuer, not from TUs failure to maintain proper procedures for safeguarding against inaccuracies. The error in TUs report traced back to the Andersons credit card from Cross Country Bank. When the Andersons changed addresses, a bank employee updating their information erroneously inserted a flag showing that the couple was deceased. The Andersons learned of this reporting error in 2000, and they took steps to correct it. However, when the bank converted its credit cards from MasterCard to Visa, it again reported the inaccurate information to CRAs. TU first learned of the plaintiffs disputed entry in November 2002. Within one week, TU began a reinvestigation into the Andersons complaint. However, because the TU agent making the correction did not update all required fields in the Andersons report, the error remained on the report. The Andersons again contacted TU in January 2003, at which time a different agent found the mistake, corrected all the relevant fields, and finally eliminated the error. The plaintiff still sued TU for failing to investigate adequately under FCRA. FCRA only requires that CRAs utilize reasonable safeguards and does not prescribe the precise procedures a CRA should implement. The court decided that, under the Andersons circumstances, TU was reasonable to rely upon the bank to verify whether the Andersons were deceased, because the bank had both the means and the motivation to do so. If someone is using credit cards of a person who is deceased, who has a stronger reason to check the legitimacy of such use but the issuer who may be held liable for any fraudulent charges? the court queried. TU followed the rules set forth in FCRA Section 1681i(a)(2). That section required TU to send notification of the dispute to the bank. TU did this. Once TU sent notice, it became the banks duty to investigate. No reasonable jury could conclude that, by following Section 1681i(a)(2), and waiting for the bank to do its duty, TU violated its statutory obligation of reinvestigation. The court also rejected the Andersons contention that TU should have recognized the bank as an unreliable source: It should go without saying that no one can rely solely on the occurrence of a mistake to argue that the mistake could have been anticipated.

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8. CONSUMER NOT REQUIRED TO PLEAD THAT A CRA GAVE NOTICE TO A FURNISHER OF A CONTESTED ENTRY; DISCOVERY ON THIS IS ALLOWED Watson v. Trans Union Credit Bureau, et al., 2005 U.S. Dist. LEXIS 7376, No. 04-205-B-C (D. Me. 04/28/05). FCRA imposes obligations on furnishers of information, technically speaking, only after a CRA notifies them about disputed record information. The furnisher must investigate the disputed information and report the results back to the CRA. A consumer can sue a furnisher under FCRA for failing to fulfill its obligations; however the consumer is not absolutely required to specifically allege in his complaint that the CRA properly notified the furnisher about the disputed credit information. Rather, the consumer should be given an opportunity to collect evidence on this point during discovery to establish this FCRA element. The plaintiff Watson was victimized by identity theft. The thief obtained credit from New Cingular Wireless and ran up cellular phone bills in Watsons name. After the identity thief failed to pay the cellular phone bills, Cingular reported the delinquent account in Watsons name to the CRAs. Watson sued Cingular for violating FCRA by failing to properly investigate and to correct inaccurate information on his credit report. Cingular moved to dismiss on the grounds that Watson inadequately alleged a FCRA violation since Watson did not assert that Cingular as the furnisher was notified by a CRA. FCRA Section 1681s-2(b)(1) provides that [a]fter receiving notice pursuant to section 1681i(a)(2) of a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall take certain measures to address and resolve the dispute. Cingular argued that Watsons claim should be dismissed because he failed to allege that Cingular received notice from a CRA . The Court disagreed: Given the fact that [the consumer] would not necessarily be privy to communications between the credit reporting agency and the furnisher, it is legitimate to allow [him] discovery on the question, rather than dismissing the action for want of a straw allegation. 9. FURNISHERS NEED NOT INVESTIGATE DISPUTES REPORTED BY THE CONSUMER; THE REPORT MUST COME THROUGH A CRA Robinson v. American Honda Finance Corporation, 2005 U.S. Dist. LEXIS 8209, No. 032220 B/A (W.D. Tenn. 03/31/05). Consumers who dispute information in their credit reports should take up their case with the CRAs, not the entities that furnished the disputed information. A furnisher of credit information has no duty under FCRA to investigate disputed information reported directly by the consumer. FCRA only requires furnishers to conduct investigations when notified of a dispute by a CRA. If the CRA was not the starting point of an alleged credit report complaint with details as to the inaccuracy, then there may be no FCRA claim against a furnisher for inaccurate reporting/investigation.

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The plaintiff, Robinson, sued American Honda Finance for violating FCRA by furnishing inaccurate information about him to a CRA. Robinson based his claim on FCRA Section 1681s-2(b). American Honda moved to dismiss. The Western District of Tennessee dismissed Honda for lack of any proof that the FCRA complaint process was complied with by the plaintiff. FCRA Section 1681s-2(b) provides as that [a]fter receiving noticeof a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall conduct an investigation, review all relevant information and report the results of the investigation to the CRA. Thus, Robinson was required to show that Honda received notice of Robinsons dispute from a CRA. The plaintiff failed on this proof element: At no point in this casehas the plaintiff asserted that the furnisher, Honda, received notice from a consumer reporting agency that the credit report item at tissue here was inaccurate, concluded the judge. Rather, he continues to insist that he repeatedly informed Honda of the inaccuracy to no avail. As notification by a plaintiff does not satisfy the statutes notice requirement, Robinson has no claim under 1681s-2(b). 10. CONSUMERS CANT SUE FURNISHERS FOR INACCURATE INITIAL REPORTING TO THE CRAs: THERE IS NO PRIVATE ACTION UNDER FCRA SECTION 1681s-2(a) Gorman v. Wolpoff & Abramson, LLP, et al., 370 F. Supp. 2d 1005 (N.D. Cal. 2005). A consumer can only bring a private action under FCRA subsection (b) of Section 1681s-2, based on a furnishers willful or negligent failure to respond properly after being informed of a consumer dispute. However, there is no private action under subsection (a), which imposes obligations on furnishers to ensure that they provide accurate information to CRAs in the first instance. There are unintended errors in the credit reporting system. Furnisher are to provide accurate data in the first instance, subject to regulatory oversight. Consumers cannot sue for initial mistakes in reporting -- only for a failure to respond properly to a specific complaint. Section 1681s-2(a) prohibits the reporting of erroneous information, imposes a duty to correct and to update information, and requires notice of a consumers dispute. Section 2(b) imposes additional duties once a furnisher of information receives notice from a CRA about a consumer dispute. The furnisher must conduct an investigation, review all relevant information, report the results, and modify, delete or block inaccuracies or incomplete information. Generally, all of the provisions of FCRA can be privately enforced under FCRA sections 1681n or 1681o if a willful or negligent violation occurs. However, Sections 1681n and o cannot be used to privately enforce Section 1681s-2(a), said the Northern District of California. The court relied upon the 9th Circuit Court of Appeals decision in Nelson v. Chase Manhattan Mortgage Co., 282 F.3d 1057 (9th Cir. 2002). In Nelson, the 9th Circuit held that subsections (c) and (d) of Section 1681s-2 exclude private actions under subsection (a). Private actions are allowed by subsection (b) of Section 1681s-2.

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Accordingly, a consumer may bring a private action against a furnisher only based upon a willful or negligent violation of Section 1681s-2(b) i.e., for an improper response to a reported error in the report after the error is made. 11. NO FCRA PREEMPTION OF LIBEL CLAIMS ALLEGING MALICE OR INTENT TO INJURE, BUT PLEADING PARTICULARITY IS REQUIRED Gorman v. Wolpoff & Abramson, LLP, et al., 370 F. Supp. 2d 1005 (N.D. Cal. 2005) Generally, FCRA preempts all state claims that regulate furnishers of information to CRAs. There is a specific exception however: FCRA Section 1681h(e) allows defamation claims, provided the claims involve alleged malicious or willful conduct. The Northern District of California held that, to avoid FCRA preemption, consumers bringing libel claims against a creditor/furnisher must allege with particularity that the creditor/furnisher acted maliciously or willfully in reporting inaccurate information about the consumer to a CRA. The plaintiff sued MBNA for libel based on its reporting of a disputed debt to CRAs. MBNA argued that FCRA preempted the libel claim and moved to dismiss it. The District Court concluded that Section 1681h(e) did not preempt Gormans libel claim, provided he alleged maliciousness or willfulness. However, the court dismissed the libel claim on other grounds; namely, because the plaintiffs non-descriptive phrases and conclusory allegations in his amended complaint failed to give MBNA sufficient notice of the libel claim. FCRA Section 1681t(b) preempts all state claims to the extent that they regulate the responsibilities of persons who furnish information to credit reporting agencies. MBNA argued that this provision preempted Gormans libel claim as an impermissible attempt to regulate MBNAs responsibilities as a furnisher. Gorman countered by arguing that Section 1681h(e), specific to defamation claims, trumps Section 1681t(b) and allows him to sue MBNA for libel. FCRA Section 1681h(e) provides that no consumer may bring action in the nature of defamationwith respect to the reporting of information againstany person who furnishes information to a consumer reporting agencyexcept to as to false information furnished with malice or willful intent to injure such consumer. The court noted the canon of statutory construction that a general statute yield when there is a specific provision involving the same subject matter. Section 1681h(e) is a more specific provision. Thus, malicious libel claims are permitted.

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12. FCRA CLAIM SUBJECT TO DISMISSAL WITH PREJUDICE FOR FAILURE TO PLEAD ACTUAL DAMAGES Johnson v. CGR Services, Inc., et al., 2005 U.S. Dist. LEXIS 7889, No. 04-C-2587 (N.D. Ill. 04/07/05) A consumer suing a creditor for failing to respond properly to disputed credit information must be sure to plead actual damages under FCRA. FCRA Section 1681s-2(b) requires some element of harm. The plaintiff Johnson sued CGR Services and Providian National Bank for failing to respond properly after she disputed certain credit information they furnished to the three major CRAs. Providian moved to dismiss on the grounds that Johnson failed to plead any actual damages. Johnson merely complained that her wages were garnished to satisfy a state court judgment that was entered prior to the defendants alleged FCRA violations. The Northern District of Illinois dismissed Johnsons complaint without leave to amend. The court emphasized that FCRA does not explicitly limit the types of actual damages recoverable. For example, mental suffering will suffice. In addition, neither FCRA, nor the Federal Rules of Civil Procedure requires a consumer to plead her damages with heightened particularity. However, a FCRA complaint needs at least to give the other party some notice as to what the plaintiffs actual damages are. Taking all the allegations in Johnsons complaint as true, the court could not conceive of any actual damages that Johnson had sustained. 13. FCRA PREEMPTS PARTS OF CALIFORNIAS SB1 PRIVACY ACT American Bankers Association, et al. v. Gould, et al., 412 F.2d 1081 (9th Cir. 2005) Several states have enacted or are considering legislation to limit the ability of financial institutions to share confidential consumer financial information with their affiliates. Much of that state regulation may be preempted by FCRA. Californias Financial Information Privacy Act -- known as SB1 -- contains provisions that restrict the sharing of financial information among financial institutions and their affiliates. The Ninth Circuit held that FCRA preempts a part of SB1s affiliate sharing provisions. Insofar as SB1 attempts to regulate the communication between affiliates of information, as that term is used in FCRA 1681a(d)(1): SB1 is preempted to the extent that it applies to information shared between affiliates concerning consumers credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living that is used, expected to be used, or collected for the purpose of establishing eligibility for credit or insurance, employment or other authorized purpose. SB1 was enacted in 2003, and it regulates the disclosure of personal information about California consumers by financial institutions doing business in the state. Section 4053(b)(1) provides that a financial institution shall not share a consumers personal financial information with an affiliate unless the institution notifies the consumer in writing annually that the

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information may be disclosed to an affiliate and that the consumer has not restricted the disclosure of his nonpublic personal information. Following the annual notification, a consumer still has an opportunity to opt out of the sharing of information. The American Bankers Association (ABA), the Financial Service Roundtable (FSR) and the Consumers Banking Association (CBA) sued California state officials to prevent enforcement of SB1. The groups contended that FCRA preempted SB1s affiliate-sharing provisions. The California state officials moved for summary judgment. The District Court granted the motion, and the ABA, the FSR and the CBA appealed. The 9th Circuit reversed and remanded the case to the District Court to determine whether, applying the definition of information in FCRA Section 1681a(d)(1), any portions of the affiliate-sharing provisions of SB1 survived preemption. If the District Court determines that certain provisions were preempted, those provisions would be severable from other provisions that did not survive. FCRA Section 1681t(b)(2) provides that [n]o requirement or prohibition may be imposed under the laws of any Statewith respect to the exchange of information among persons affiliated by common ownership or common corporate control, except that this paragraph shall not apply [to a Vermont statute]. Applying federal preemption principles, the 9th Circuit determined that Congress intended Section 1681t(b)(2) to preempt all state requirements and prohibitions on the communication of information between affiliated parties. However, the FCRA meaning of information is narrow. The preemption includes only the sort of information described in the definition of consumer report in FCRA Section 1681a(d)(1). That provision specifically defines consumer report as information bearing on a consumers credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumers eligibility for -- (A) credit or insurance to be used primarily for personal, family, or household purposes; (B) employment purposes; or (C) any other purpose authorized under section 1681b of this title. Thus, the 9th Circuit held that FCRA preempts SB1 to the extent that, on remand, the District Court determines it touches consumer report-type information. 14. THE DELETION/MODIFICATION RULE FOR CRAs: DELETING POSITIVE CREDIT INFORMATION CAN VIOLATE FCRA Nielsen, et al. v. U.S. Bank, et al., 2005 U.S. Dist. LEXIS 1341, Civil No. 03-5313 (D. Minn. 01/26/05) A Credit Reporting Agency (CRA) seeking to correct an error in a consumers credit report can violate FCRA if it carelessly deletes too much data. Depending on the appropriateness of the circumstances, the deletion of positive credit information along with negative information can state a FCRA claim. The District Court of Minnesota ruled that a CRA may have violated FCRA by deleting all information in a consumers credit report relating to a particular bank loan. The bank had

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erroneously reported that the loan in question had been discharged in bankruptcy when, in reality, the consumer and her husband had paid the loan off early. The deletion of the positive credit information -- that the consumer paid off the loan early -- along with the erroneous negative information -- that the loan was discharged in bankruptcy -- violates FCRA if it was not appropriate under the circumstances. June and Kent Nielsen were denied credit because their credit records indicated they had been through a bankruptcy and had obtained a bankruptcy discharge on a car loan from U.S. Bank. This information was incorrect. The plaintiffs argued that Trans Unions improper deletion of the entire U.S. Bank account hurt their credit history by eliminating the positive credit associated with the early pay off of the car loan. June Nielsen contacted Trans Union to try to correct the error. Trans Union, in turn, contacted U.S. Bank to inquire about the car loan. U.S. Bank responded with instructions to change data as shown, but without any indication as to how the record should be changed. Trans Union simply deleted the entire U.S. Bank account from June Nielsens credit record. The plaintiff sued Trans Union for violating FCRA Section 1681i by deleting the entire U.S. Bank account from her credit record. Trans Union moved for summary judgment. The court denied the motion. Section 1681i(a) sets forth the procedure that CRAs must follow when investigating disputes about information on a consumers credit report: [i]f the completeness or accuracy of any item contained in a consumers file. . . is disputed by the consumer . . . the agency shall reinvestigate free of charge and record the current status of the disputed information, or delete the item from the file in accordance with paragraph (5). The deletion rule provides that if an item of the information is found to be inaccurate or incomplete or cannot be verified, the CRA shall promptly delete that item of information from the consumers file or modify that item of information, as appropriate, based on the results of the reinvestigation. The plaintiff contended that Trans Union violated FCRA because it knew that at least some of the information regarding the U.S. Bank account was inaccurate but failed to gather enough evidence to determine how to modify the account entry as appropriate. Trans Union responded that the FCRA term item of information refers to an entire account, not to individual pieces of information relating to an account. Trans Union contended it was required to delete the entire U.S. Bank account once it discovered that at least some of the information was inaccurate. FCRA requires that the modification or deletion of items on a consumers credit report be appropriate given the situation. The court rejected the argument that FCRA required Trans Union to delete the entire U.S. Bank account entry once it located an inaccurate piece. The issue of the appropriateness of the CRAs modifications/deletions from the plaintiffs credit records following its investigation was for a jury to decide.

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15. A FIRM OFFER OF CREDIT MUST HAVE REAL VALUE TO AVOID BEING AN IMPROPER ACCESS TO CREDIT DATA AND AN IMPERMISSIBLE SOLICITATION Cole v. U.S. Capital, Inc., et al., 389 F.3d 719 (7th Cir. 2004) Credit providers might be liable under FCRA when accessing consumer credit information to prescreen consumers for unsolicited offers of credit if they fail to qualify under the firm offer exception (allowing use of privacy data for a proper purpose). If the credit offer is deemed a sham because it lacks real value, then a providers accessing of consumer credit information could violate FCRA. Even if the offer is deemed a bona fide firm offer, the credit provider could still be found to have violated FCRA if statutorily required disclosures are not presented clearly and conspicuously in the providers offering materials. The 7th Circuit held that it is a FCRA violation for credit providers to access consumer credit information in connection with a sham offer of credit. A sham offer of credit is an offer that has no real value to a consumer. The facts of the case are important. The plaintiff, Oneta Cole, received a flyer from U.S. Capital and Gleason Chevrolet purporting to offer her $21,500 worth of credit. According to the flyer, Cole was pre-approved for the offer based on her credit report. Various FCRA disclosures appeared in fine print at the very bottom of the flyer. Cole sued, alleging that U.S. Capital and Gleason Chevrolet violated FCRA by improperly accessing her credit report and by failing to make adequate FCRA disclosures. The District Court dismissed her case, but on appeal the 7th Circuit reversed and reinstated the claims. FCRA Section 1681b(c)(1)(B)(i) allows a credit provider to access consumer credit information without preauthorization, but only if the provider is making a firm offer of credit to consumers. What is a firm offer? Is $1 of credit firm? In the Cole case, the defendants argued that there is a firm offer as long as some amount of credit, even $1, is guaranteed. The 7th Circuit disagreed. Based in part upon an amicus brief filed by the FTC supporting the plaintiffs interpretation of FCRA, the court held that an offer was not a firm offer of credit unless it had some real value to a consumer. When a credit provider accesses consumer credit information without meeting a FCRA proper purpose section, it is an invasion of privacy. An offer of credit that lacks real value doesnt justify such an invasion of privacy. The court listed the four factors to consider in determining whether an offer has real value: (1) the amount of credit offered; (2) the reasonableness of credit terms; (3) whether material terms are missing; and (4) whether the offer is likely to be honored. Applying these factors to Coles case, the 7th Circuit agreed there were sufficient grounds for her accusation that defendants offer was a sham with no real value. Clear and conspicuous disclosures FCRA Section 1681m(d) requires that all offers of credit contain clear and conspicuous disclosure of requisite consumer- rights language. Disclosures are clear and conspicuous if they are presented in such a manner that a consumers attention will be drawn to them. This may be accomplished in a number of ways, such as printing the disclosure language in bolded or all capital letters.

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The defendants flyer contained various FCRA disclosures in fine print at the very bottom of the document. There was nothing to focus the readers attention on the disclosures. To the contrary, the flyer was designed to ensure consumers paid minimal attention to the disclosures. 16. MOTION FOR RECONSIDERATION UNSUCCESSFUL IN ADVERSE ACTION NOTICE CASE BASED ON LOWEST POSSIBLE LOAN RATE APPLICATION Crane, et al. v. American Home Mortgage Corp., 2004 U.S. Dist. LEXIS 22477, No. 03-5784 (E.D. Pa. 10/21/04) Whether a customer asks a creditor for the lowest possible rate or for the best rate that he qualified for if a creditor extends an offer of credit after review of the customers credit report which is not at the best rate, then a FCRA adverse action may have occurred and an adverse action notice may be required. In Crane, Eastern District of Pennsylvania held that a FCRA adverse action notice claim presented a question for the jury. The consumer claimed that the lender did not send him a notice of adverse action as required by FCRA. The lender argued that if the court would clarify the facts, it would be apparent that there was no legal basis requiring it to send notice of adverse action to the consumer. The court restated the facts, but said that the amended facts did not change the courts opinion that the jury should decide the FCRA adverse action notice issue. FCRA Section 1681m(a) provides that whenever any person takes adverse action against a consumer based on information in the consumers credit report, the consumer must be given a notice and information on how to contact the CRA for additional information. The plaintiff, Joseph Crane, said he called American Home Mortgage and asked for the lowest possible interest rate. After reviewing his credit report, American told Crane that he would not be eligible for Americans prime rate and that he would have to pay an interest rate at least 1 percent higher than its lowest rate. Crane claimed that American took adverse action in denying him the lowest rate and that the lender failed to send him the FCRA required notice. American argued that the court mischaracterized the facts in this case when it denied its motion for summary judgment. The opinion stated that American took adverse action when it declined to prequalify Crane for the loan at the prime rate after reviewing his credit report. American argued the changed facts were that Crane never requested a loan at the prime rate. Instead, he asked for the best rate that he qualified for, and that is the information he received. Therefore, American argued there was no FCRA basis for concluding that adverse action was taken against Crane. On Americans motion to reconsider, the court acknowledged that at the hearing it may have misstated some facts, and the record was clarified. However, the factual clarification did not change the outcome. The central issue was still whether Americans conduct after Cranes loan request constituted an adverse action under FCRA, and this was deemed to be a jury question.

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17. PERMISSIBLE PURPOSES TO ACCESS CREDIT DATA: CRAs HAVE NO DUTY TO LOOK BEYOND A FACIALLY VALID REQUEST FOR A CONSUMER REPORT Levine v. World Financial Network National Bank and Experian, 2004 U.S. Dist. LEXIS 22864, No. 1:04-CV-1283-BBM (N.D. Ga. 11/08/04) Consumers have no FCRA claim against creditors or CRAs who access their credit report data for account review purposes after the date such accounts may have closed. Even if a consumers credit card account has been closed for years, this does not mean that a CRA cannot release the account information to a bank for review. FCRA does not put time limitations on when the creditor can review the account during the course of the parties relationship. The Northern District of Georgia dismissed claims against a CRA for alleged willful violations of FCRA. The consumer claimed that the CRA released his credit report in violation of FCRA. The CRA maintained it had reason to believe that the report was being used for a permissible purpose. The court agreed with the CRA. FCRA Section 1681b provides that a CRA may furnish a consumer report under certain circumstances, including when the CRA has reason to believe that the report will be used for review of the consumers account. In this case, the plaintiff, Steven Levine, had paid off his credit card and closed the account. Nevertheless, four years later, his closed account was sold to World Financial Network National Bank. Allegedly to review his account, World Financial obtained a copy of Levines credit report from Experian. Levine claimed that Experian willfully violated FCRA because it knew that his account was closed when it furnished the report to World Financial. Also, Levine claimed that Experian was liable because it failed to maintain reasonable procedures to ensure that consumer reports would be furnished only for the permissible purposes allowed by FCRA. Levine argued that although FCRA permits the release of his report for the purpose of account review, this need-to-review rule does not apply to accounts that are closed. There was no account to review, the plaintiff said, and therefore, there could be no permissible purpose to request his credit report. Experian countered that Levine failed to state a claim because the FCRA authorizes the release of a consumer report for account review without qualification and this provides CRAs protection -- as a permissible purpose -- even after the account has been closed. The court pointed out that Experian had no duty to investigate a facially valid request for a credit report. Further, FCRA does not suggest that a credit report may be obtained only for account review during particular points in time or during the parties relationship. While another section of FCRA does have language limiting the access to reports of an existing credit obligation, the FCRA section at issue does not. The Court also rejected an opinion letter from the FTC stating that once an account is closed -- because the consumer has paid the debt in full or notified the creditor to close the account -- no permissible purpose exists for a CRA to provide file information on that consumer to the creditor. The FTC letter was not binding on the court. The Court noted that Levine had filed three similar cases that were ultimately dismissed. In Levine v. First Union Natl Bank, No. 1:99-cv-3173-MHS (N.D. Ga. 04/08/99),

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the court held that a CRA had reason to believe that the bank had a proper purpose in requesting the consumer report for account review. The court in Levine v. Beneficial Natl Bank, No. 1:99-cv-3172-WBH (N.D. Ga. 05/17/00) (unpublished), dismissed the case for failure to state a claim. The court held that to require the CRA to go beyond a requestors facially valid representation without any suggestion of impropriety regarding the request placed too heavy a burden on CRAs. 18. CONSUMER LACKED EVIDENCE AS TO ACTUAL DAMAGES UNDER FCRA IN CRA FAILURE TO UPDATE CASE Wantz v. Experian Information Solutions, 386 F.2d 829 (7th Cir. 2004) A FCRA claim brought by a consumer seeking damages for humiliation and emotional distress must be plead with particularity and specificity to avoid dismissal. Unless the situation was so degrading that a reasonable person would infer emotional distress under those circumstances, a claim for actual damages under FCRA will not make it to the jury. In a dispute concerning credit information reported in a consumers report, the 7th Circuit agreed with the lower court and said that the consumer lacked evidence to establish his damages. FCRA Section 1681i(a) requires a CRA to conduct a reinvestigation into a consumer dispute and to update its files accordingly within 30 days. Under Sections 1681o and 1681n, a consumer has a private right of action for a negligent or for a willful violation. The CRA is liable to the consumer for actual damages for negligent violations. The CRA might be liable for punitive damages, but only for willful violations of FCRA. The 7th Circuit held that the consumer failed to show that a potential creditor denied him credit because of what the CRA reported, and the court rejected the consumers claim that a jury could award actual damages for his emotional distress. The only evidence presented was the consumers own testimony that he was humiliated and embarrassed every time he was rejected for credit and that it was mentally and emotionally distressing when dealing with creditors. The court determined that this was insufficient because the consumer did not show that the defendant CRA, rather than another CRA, disclosed the allegedly damaging information. The consumer made conclusory statements of emotional damages, rather than explaining the circumstances of his injury in detail. The only exception to this standard of proof is if the facts underlying the case are so inherently degrading that it would be reasonable to infer that a person would suffer emotional distress. That was not the factual situation here, the 7th Circuit held. The consumer also sought damages based on the CRAs alleged willful misconduct. The court surmised that the consumer was apparently seeking punitive damages, which are only available for willful violations. However, because there was no evidence that the CRA deliberately disclosed incorrect information to a third party, the consumer could not establish a FCRA violation much less a knowing and intentional violation.

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19. FCRA ADVERSE ACTION CATCH-ALL-NOTICE REQUIRED FOR LENDERS THAT CHARGE PMI INSURANCE PREMIUMS DIRECTLY TO CONSUMERS Karwo v. CitiMortgage, Inc., et al., 2004 U.S. Dist. LEXIS 17878, No. 04 C 1944 (N.D. Ill. 09/02/04). Does a lender that charges consumers directly for Private Mortgage Insurance (PMI) need to send out notices of adverse action if they charge a premium higher than the lowest available rate? The answer is yes, according to the Northern District of Illinois, because FCRA does not exempt lenders that contract with and have control over the rate of the premium. The plaintiff stated a potential claim, and the court denied the lenders motion to dismiss. The court refused to dismiss a consumers claim against a lender that it violated FCRA when it failed to send the consumer a notice of adverse action. The consumer argued the lender was required to send the notice after it quoted a premium for PMI that was higher than the lowest available premium. The lender argued that quoting a higher PMI premium was not adverse action. FCRA Section 1681m(a) requires a creditor to give notice to the consumer when adverse action has been taken based on information in the consumers credit report. The definition of adverse action in Section 1681a(k)(1)(B)(i) includes an increase in the charge, or other adverse change, in the terms of coverage of any insurance. The definition also includes a catchall provision that includes action taken related to an application made by, or a transaction initiated by, any consumer. To be sure, in Treadway v. Gateway Chevrolet Oldsmobile, Inc., 362 F.3d 971 (7th Cir. 2004), the 7th Circuit applied the catchall-adverse-action-notice-provision to a credit transaction. The court reasoned that nothing in the catchall provision excludes mortgage insurance transactions. The Court thus held that there was no reason why insurance-specific provisions should escape the FCRA adverse action notices, while credit-specific provisions should trigger notices. The lender, CitiMortgage argued that it did not take adverse action and relied on two cases. Rausch v. Hartford Fin. Servs. Group, Inc., 2003 WL 22722061 (D. Or. 2003), and Mark v. Valley Ins. Co., 275 F. Supp. 2d 1307 (D. Or. 2003). These cases held that the initial setting of insurance premiums at a rate higher than the standard one is not adverse action because there is no increase in a premium and no change in insurance terms. CitiMortgage maintained that its initial charge for PMI did not constitute adverse action because there was no increase in any previous rate. The Northern District of Illinois rejected CitiMortgages arguments. The plain meaning of the word increase did not necessarily mean that the increase must be related to an initial premium paid by the consumer. The FCRA reference to an increase in the charge could also relate to the normal premium that a similarly situated consumer without an adverse credit report would pay. The 6th U.S. Circuit Court of Appeals felt similarly in Cornist v. B.J.T. Auto Sales, Inc., 272 F.3d 332 (6th Cir. 2001), where a dealers sales price for an automobile sold to a credit customer, which was higher than the price for a cash customer, was an increase triggering FCRA adverse action notice.

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The lenders control over the PMI rates and the forcing of PMI on a consumers mortgage credit transaction was important to the Court. In the PMI insurance context, the consumer does not contract directly with the PMI insurer. The lender plays a significant role and the FCRA notice facilitates consumer awareness.

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