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11th Circuit revives FCRA claims against credit-reporting agency
On April 28, the U.S. Court of Appeals for the Eleventh Circuit vacated a district court’s judgment, holding that it was unclear whether a credit reporting agency (CRA) took “reasonable procedures to assure maximum possible accuracy of the information” as required under the FCRA after a consumer claimed his credit report contained inaccuracies. The consumer contacted the CRA after noticing his credit report showed he was delinquent on a mortgage that was discharged in bankruptcy. The CRA sent an automated consumer data verification to the mortgage servicer who confirmed the debt. The consumer claimed that the CRA did not take further steps to investigate the situation and failed to correct the credit report until after the consumer commenced the litigation against the CRA for willfully violating the FCRA. The district court disagreed with the consumer, concluding that under both § 1681e and § 1681i, the CRA’s actions were reasonable as a matter of law. Among other things, the consumer failed to provide the CRA “with specific information from which it could have discovered that he no longer owed money” on the mortgage, the district court found, determining also that the consumer’s “theory of liability was a ‘bridge too far’ because it would require [CRAs] to examine court orders and other documents to determine their legal effect.”
On appeal, the Eleventh Circuit disagreed that the measures taken by the CRA after it was notified of the inaccuracy in the consumer’s report were “‘reasonable’ as a matter of law.” The CRA did “nothing, although it easily could have done something with the information” provided by the consumer, the appellate court wrote. However, the court emphasized that its decision was a narrow one. “Just as we cannot hold that [the CRA’s] procedures were per se reasonable, we do not hold that they were per se unreasonable,” the appellate court wrote, noting that it also could not “hold that in every circumstance where a plaintiff informs a [CRA] of an inaccuracy, the agency must examine court records to independently discern the status of a debt.” Additionally, the appellate court determined that although a bankruptcy discharge does not expunge a debt, the consumer’s credit report was still factually inaccurate because he “was no longer liable for the balance nor was he ‘past due’ on any amount for more than 180 days.”
FTC provides AI guidance
On April 19, the FTC’s Bureau of Consumer Protection wrote a blog post identifying lessons learned to manage the consumer protection risks of artificial intelligence (AI) technology and algorithms. According to the FTC, over the years the Commission has addressed the challenges presented by the use of AI and algorithms to make decisions about consumers, and has taken many enforcement actions against companies for allegedly violating laws such as the FTC Act, FCRA, and ECOA when using AI and machine learning technology. The FTC stated that it has used its expertise with these laws to: (i) report on big data analytics and machine learning; (ii) conduct a hearing on algorithms, AI, and predictive analytics; and (iii) issue business guidance on AI and algorithms. To assist companies navigating AI, the FTC has provided the following guidance:
- Start with the right foundation. From the beginning, companies should consider ways to enhance data sets, design models to account for data gaps, and confine where or how models are used. The FTC advised that if a “data set is missing information from particular populations, using that data to build an AI model may yield results that are unfair or inequitable to legally protected groups.”
- Watch out for discriminatory outcomes. It is vital for companies to test algorithms—both prior to use and periodically after that—to prevent discrimination based on race, gender, or other protected classes.
- Embrace transparency and independence. Companies should consider how to embrace transparency and independence, such as “by using transparency frameworks and independent standards, by conducting and publishing the results of independent audits, and by opening. . . data or source code to outside inspection.”
- Don’t exaggerate what your algorithm can do or whether it can deliver fair or unbiased results. Under the FTC Act, company “statements to business customers and consumers alike must be truthful, non-deceptive, and backed up by evidence.”
- Data transparency. In the FTC guidance on AI last year, as previously covered by InfoBytes, an advisory warned companies to be careful about how they get the data that powers their models.
- Do more good than harm. Companies are warned that if their models cause “more harm than good—that is, in Section 5 parlance, if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers and not outweighed by countervailing benefits to consumers or to competition—the FTC can challenge the use of that model as unfair.”
- Importance of accountability. The FTC warns of the importance of being transparent and independent and cautions companies to hold themselves accountable or the FTC may do it for them.
Court denies lender’s bid to arbitrate DACA suit
On April 12, the U.S. District Court for the Northern District of California denied defendants’ motion to compel arbitration in a matter alleging a lender denied plaintiffs’ applications based on their immigration status. The plaintiffs filed a putative class action against the defendants, alleging the lender denied their loan applications based on one of the plaintiff’s Deferred Action for Childhood Arrivals (DACA) status and the other plaintiff’s status as a conditional permanent resident. The plaintiffs claimed that these practices constituted unlawful discrimination and “alienage discrimination” in violation of federal law and California state law. The plaintiffs also alleged that the lender violated the FCRA by accessing one of their credit reports without a permissible purpose. The defendants moved to compel arbitration and dismiss the claims.
With respect to the defendants’ motion to compel arbitration, the lender claimed that the DACA plaintiff “expressly consented to arbitration” when he was required to check a box labeled “I agree” in order to proceed with his online student loan refinancing application back in 2016. However, the DACA plaintiff argued the arbitration agreement “lacked adequate consideration” because he was ineligible for a loan as a DACA applicant, and that even if it were a valid agreement, it only applied to his 2016 application and not to his subsequent attempts to refinance his student loans. In denying the lender’s motion to compel arbitration, the court concluded that the DACA plaintiff did not claim that he was seeking to reopen or have the lender reconsider his 2016 application, but rather he asserted that these were “standalone attempted transactions,” and as such, did not fall within the scope of the 2016 arbitration agreement.
In reviewing whether the lender’s policies constitute alienage discrimination, the court determined, among other things, that while the lender “asserts that it does not discriminate against non-citizens because some non-citizens—namely [lawful permanent residents] and some visa-holders—are still eligible to contract for credit with [the lender],” the distinction “is not supported by the language of the statute,” noting that under 42 U.S.C. § 1981, protections “extend to ‘all persons within the jurisdiction of the United States.’” Additionally, the court ruled that the second class of conditional permanent residents whose credit reports were pulled by the lender and allegedly experienced a decrease in their credit scores—despite plaintiffs claiming the lender’s policy states that permanent residents are ineligible for loans if their green cards are valid for two years or less—may proceed with their FCRA claims.
2nd Circuit: Credit report showing “satisfied” judgment was not misleading
On April 9, the U.S. Court of Appeals for the Second Circuit held that a credit reporting agency’s (CRA) report that a judgment was “satisfied” was accurate and not misleading under the FCRA. According to the opinion, a debt collection action was brought and default judgment entered against the plaintiff. The parties ultimately filed a joint stipulation to resolve the action and discontinue all claims with prejudice. Afterwards, the CRA’s report showed the default judgment, but was later amended to read “judgment satisfied”—a statement that the plaintiff allegedly repeatedly disputed. The plaintiff ultimately filed a lawsuit against the CRA, alleging the agency “willfully and/or negligently violated various FCRA provisions by persisting in publishing [the] report and failing to follow certain of the FCRA’s procedural notice requirements.” Among other things, the plaintiff claimed that the CRA also violated the FCRA’s source-disclosure and reinvestigation provisions and should have disclosed that the information about the judgment came from a contractor-intermediary working for the CRA. The district court dismissed one of the FCRA claims and granted summary judgment to the CRA on the remaining FCRA claims.
On appeal, the 2nd Circuit agreed with the district court, concluding first that there was no FCRA reporting violation because the description of the judgment as “satisfied” was accurate. Moreover, the appellate court wrote, even if the CRA should have disclosed that the contractor was the source, the plaintiff “failed to present any evidentiary basis for concluding that he suffered actual damages” resulting from the CRA’s failure to not disclose or treat the contractor as a source or furnisher of the information about the judgment. The 2nd Circuit further rejected the plaintiff’s claims against the CRA for willful violations of sections 1681g and 1681i, concluding that the sections “can be reasonably interpreted not to require such a disclosure and no more need be shown.”
11th Circuit: Arbitration provision survives termination of subscriber agreement
On April 5, the U.S. Court of Appeals for the Eleventh Circuit held that an arbitration provision survived the termination of a subscriber agreement between a defendant cable company and a customer. According to the opinion, the plaintiff obtained services from the defendant in December 2016, and signed a subscriber agreement containing an arbitration provision covering claims that arose before the agreement was entered into and after it expired or was terminated. The plaintiff terminated the defendant’s services in August 2017, but later called the defendant in 2019 to inquire about pricing and services. The plaintiff filed a putative class action, alleging the defendant violated the FCRA when it accessed his credit report during the call without his permission, thus lowering his credit score. The defendant moved to compel arbitration, which the district court denied, ruling that while the parties may have intended for the arbitration provision to survive termination of the subscriber agreement, the plaintiff’s claim fell outside the scope of the subscriber agreement because “no reasonable person would believe that the Arbitration Provision was so all-encompassing as to apply to all claims regardless of when they occurred or whether they related to the agreement.” Moreover, the district court ruled that the Federal Arbitration Act (FAA) “could only compel [the plaintiff] to arbitrate his FCRA claim if it ‘arose out of’ or ‘relate[d] to’ the 2016 subscriber agreement, which the district court held it did not.
On appeal, the appellate court disagreed, concluding that the plaintiff’s FCRA claim relates to the 2016 subscriber agreement since the defendant was only able to conduct the credit check during the phone call because of its previous relationship with the plaintiff. The plaintiff argued that he was calling to obtain new services and not to reconnect services, but the appellate court countered that the “reconnection provision” contained within the subscriber agreement provides broad language that defines terminate, suspend, and disconnect as not necessarily being mutually exclusive. However, the 11th Circuit clarified that its holding is narrow, and that because it concluded that the plaintiff’s claim did arise out of the subscriber agreement the court did not need to and was not making a determination about whether the “broad scope” of the arbitration provision in the subscriber agreement is enforceable under the FAA.
5th Circuit: Law firm may send debt dispute letters on behalf of clients
On April 1, the U.S. Court of Appeals for the Fifth Circuit upheld a district court’s ruling in favor of defendant credit repair organizations (including a law firm), holding that plaintiff data furnishers failed to provide sufficient evidence supporting their claims of fraud and fraud by nondisclosure. The plaintiffs filed suit, alleging that the defendants were sending dispute letters that appeared to have come directly from the defendants’ debtor clients. Under the FCRA and the FDCPA, the plaintiffs are obligated to investigate disputed debts that come directly from debtors. Letters from law firms, the plaintiffs argued, do not trigger such requirements. According to the plaintiffs, the disputes they were receiving were costing them money to investigate, which they would not have spent if had they known the letters were coming from a law firm. A jury returned a verdict in favor of the plaintiffs on their claims of fraud and fraud by non-disclosure and awarded them roughly $2.5 million. The district court ultimately vacated the jury’s verdict, however, explaining that the evidence failed to show that the defendants made any false misrepresentations, material or otherwise, when they signed their clients’ names on letters mailed to the plaintiffs. The law firm defendant “had the legal right to sign its clients’ names on the correspondence it sent on their behalf to data furnishers who reported inaccurate information about the clients’ credit,” the district court wrote.
On appeal, the 5th Circuit determined, among other things, that the plaintiffs did “not provide any precedential support or explanation for their assertion that these facts demonstrate Defendants committed fraud and fraud by non-disclosure beyond the observation that the jury found for them on those claims.” Moreover, the appellate court disagreed with the plaintiffs’ argument that the engagement agreements that clients signed with the defendant law firm, which allowed it to send dispute letters on a client’s behalf, were fraudulent because the defendant law firm did not discuss the letters with the consumers first. According to the appellate court, the existence of any such discussion was immaterial because the engagement agreements allowed the defendant law firm to send letters on a client’s behalf. However, the appellate court noted that “[w]hile we do not hold today that there are no situations in which a third party may act fraudulently when it mails dispute letters (and leave for another day what those situations may be), we can safely say that this is not one of them.”
Court orders arbitration on non-signatory claims
On January 21, the U.S. District Court for the Eastern District of Pennsylvania granted a national cable provider’s motion to compel arbitration in a putative class action alleging the company violated the FCRA by checking consumer credit reports without a permissible purpose. According to the opinion, after the consumer filed the putative class action, the company moved to arbitrate the claims pursuant to a provision contained “in various written materials that were originally provided to [the consumer]’s household in 2006” upon the opening of a company account. In response, the consumer asserts that the arbitration provision is not binding on him, because he was not the signatory on the document that contains the provision. The court disagreed with the consumer, concluding that, even though he was a non-signatory, he “actively sought and obtained benefits provided pursuant to the Subscriber Agreement, such that he is equitably estopped from avoiding the Arbitration Provision contained therein.” Specifically, the court acknowledged the existence of the arbitration agreement was not in dispute, but whether the consumer was bound by it. The court found that, not only did the consumer obtain benefits from the household account, he also “exceris[ed] control over the account,” including placing servicing calls regarding the account. Moreover, because the claims filed by the consumer fall within the scope of the arbitration agreement, as they “relate[] to [company] and/or [consumer]’s relationship with [company],” and the court granted the company’s motion to compel arbitration.
CFPB files action against mortgage lender for unlawful practices
On January 15, the CFPB announced a complaint filed in the U.S. District Court for the District of Connecticut against a mortgage lender and four executives (collectively, “defendants”) alleging the defendants engaged in unlawful mortgage lending practices in violation of TILA, FCRA, ECOA, the Mortgage Acts and Practices—Advertising Rule (MAP Rule), and the CFPA. According to the complaint, from as early as 2015 until August 2019 (i) unlicensed sales people would take mortgage applications and offer and negotiate mortgage terms, in violation of TILA and Regulation Z; (ii) company policy regularly required consumers to submit documents for verification before receiving a Loan Estimate, in violation of TILA and Regulation Z; (iii) employees would deny consumers credit without issuing an adverse action notice, as required by the FCRA or ECOA; and (iv) defendants regularly made misrepresentations about, among other things, the availability and cost savings of a FHA streamlined refinance loan, in violation of the MAP Rule. The Bureau is seeking an injunction, as well as, damages, redress, disgorgement, and civil money penalties.
CFPB settles with auto loan company for inaccurate furnishing
On December 22, the CFPB announced a settlement with a nonprime auto loan originator and servicer (company) for allegedly violating the FCRA by providing erroneous consumer loan data to consumer reporting agencies (CRAs). According to the consent order, between January 2016 and August 2019, the company (i) furnished inaccurate information to CRAs it knew or should have known was inaccurate; (ii) failed to promptly update information with the CRAs once it was determined to be inaccurate or incomplete; (iii) failed to furnish dates of first delinquency for severely delinquent or charged off accounts; and (iv) failed to implement reasonable written policies and procedures regarding the accuracy of furnished information. The consent order imposes a civil money penalty of $4.75 million and requires the company to, among other things, correct all inaccuracies identified by the Bureau, conduct monthly reviews of information furnished to CRAs, and establish reasonable written policies and procedures regarding the accuracy and integrity of furnished information.
CFPB and Arkansas AG settle with company for failing to provide risk-based pricing notices
On December 11, the CFPB and the Arkansas attorney general announced a proposed settlement with a Utah-based home-security and alarm company for allegedly failing to provide proper notices under the FCRA. According to the complaint filed in the U.S. District Court for the Eastern District of Arkansas, the company allows consumers to defer payment for the alarm and security-system equipment over the life of a long-term contract, and therefore extends credit to its customers. The company—in extending credit to its customers—allegedly obtained and used consumers’ credit scores to determine the amount of activation fees it would charge for its products and services, and then charged consumers who had lower credit scores higher fees without providing those consumers with required risk-based pricing notices. Under the FCRA and implementing regulation, Regulation V, companies are required to provide notice to consumers if a consumer receives less favorable credit terms based on a review of his or her credit report. Under the proposed settlement, the company is required to pay a $600,000 civil money penalty, of which $100,000 will be offset provided the company pays that amount to settle related litigation with the State of Arkansas that is currently pending in state court. The company will also be required to provide proper risk-based pricing notices under the FCRA.