Consumer Compliance Outlook: Fourth Quarter 2009

On the Docket: Recent Federal Court Opinions

REGULATION Z - TRUTH IN LENDING ACT (TILA)

Court rules on timing for open-end disclosures. Muro v. Target Corp. External Site, 580 F.3d 485 (7th Cir. 2009). The Seventh Circuit affirmed the dismissal of a class action suit alleging that Target violated §1637 of TILA when it mailed the plaintiff an unsolicited credit card along with the initial account disclosures. The plaintiff alleged that §1637(a) requires that disclosures be provided before the account is opened and that Target had already opened the account when it mailed the disclosures. The Seventh Circuit analyzed this claim under §226.5(b)(1) of Regulation Z External Site, which requires creditors to provide initial disclosures for open-end credit plans "before the first transaction is made under the plan." The court interpreted this to mean that if a creditor provides disclosures "before the card is activated, before any fees are incurred and before any charges are made to the new account," the creditor has provided disclosures before an account is open. Because it was undisputed that the plaintiff never activated the card, never incurred any fees, and never made any charges, the court held that §1637(a) was not violated. The plaintiff also argued that Target violated §1637(c), which identifies the information that must appear in credit card solicitation and application disclosures. To establish liability under §1637(c) for omitting required disclosures, a plaintiff must have paid a card fee or used the card. Because the plaintiff did not satisfy these requirements, this claim was also dismissed.

Court rules on finance charge disclosures. Escher v. Decision One Mortgage Company, LLC External Site, 2009 U.S. Dist. LEXIS 89646 (E.D. Pa. Sept. 29, 2009). This case is an appeal of a bankruptcy court's ruling that a lender did not violate TILA by failing to disclose as prepaid finance charges a mortgage broker's yield spread premium (YSP) and title insurance overcharges. The court affirmed the YSP ruling based on prior court decisions and §226.4(a) (3)-3 of the Official Staff Commentary for Regulation Z, which states that "[c]ompensation paid by a creditor to a mortgage broker under an agreement is not included as a separate component of a consumer's total finance charge." The court reversed the ruling on the title insurance overcharge, however. Under §1605(e) of TILA External Site and §226.4(c)(7) of Regulation Z External Site, reasonable and bona fide title insurance fees are excluded from the finance charge. The Pennsylvania Department of Insurance sets the rate for title insurance in Pennsylvania, including a basic rate and a lower rate for refinanced mortgages. The borrowers were charged the basic rate, even though they qualified for the refinance rate. The borrowers argued that the overcharge was not reasonable and bona fide and therefore should have been disclosed as a finance charge. The court determined that the lower court incorrectly placed the burden on the borrower to demonstrate eligibility for the lower rate policy and therefore reversed the ruling and remanded the case to the bankruptcy court for further proceedings.

FAIR CREDIT REPORTING ACT (FCRA)

Willful FCRA violation does not require proof of actual damages. Beaudry v. TeleCheck Services, Inc. External Site, 579 F.3d 702 (6th Cir. 2009). The plaintiff filed this class action suit under the FCRA against several businesses that provide check-verification services. She alleged that when the state of Tennessee changed its driver's license numbering system, the defendants failed to link drivers' prior license numbers with the new ones. As a result, the plaintiff was classified as a first-time check writer in the defendant's consumer reports. The plaintiff alleged that this conduct constituted a willful violation of §1681e(b) of the FCRA External Site, which requires businesses that prepare consumer reports to follow "reasonable procedures to assure maximum possible accuracy of the information" in the reports. The trial court granted the defendants' motion to dismiss the case because the plaintiff did not allege that she sustained any injuries as a result of the alleged violation. The Sixth Circuit reversed, holding that a willful violation of the FCRA does not require actual proof of damages because the damage provision in §1681n(a) of the FCRA External Site allows a plaintiff to recover either actual damages or statutory damages between $100 and $1,000 for willful violations.

Firm offers of credit do not require value. Gelman v. State Farm Mutual Auto. Ins. Co. External Site, 583 F.3d 187 (3d Cir. 2009). The Third Circuit affirmed the dismissal of a class action suit alleging that a prescreened, unsolicited insurance offer from State Farm did not constitute a firm offer of insurance under FCRA requirements because it did not have value. Section §1681b of the FCRA External Site outlines the limited circumstances under which a consumer reporting agency (CRA) may furnish a consumer's credit report without the consumer's consent. Under §1681b(c) (1), insurance and credit providers may obtain from the CRAs prescreened mailing lists of consumers who meet certain eligibility criteria, provided they make a firm offer of credit or insurance to the people on the list and honor the offer if the consumer meets the prescreening eligibility criteria. State Farm relied on this provision in sending the plaintiff a letter stating that he could save up to $356 on auto insurance with State Farm. The plaintiff alleged that the offer violated the FCRA because it had no value. The Third Circuit rejected this argument, holding that §1681b requires only that offers be firm, not that they have value. The court found that State Farm's insurance offer, while it contained substantial puffery and promotional statements, satisfied §1681b(c)(1) because it would be honored if the plaintiff met certain criteria.

Court affirms FCRA's preemption of state laws. Premium Mortgage Corporation v. Equifax, Inc. External Site, 583 F.3d 103 (2d Cir. 2009). The Second Circuit affirmed the dismissal of a mortgage broker's class action suit against several consumer reporting agencies. The lawsuit alleged that the defendants' practice of allowing lenders to purchase prescreened consumer reports with trigger leads violated various state laws. A trigger lead results from the mortgage loan application process, with a lead indicating that a consumer has expressed an interest in obtaining a loan. The plaintiff alleged that the trigger leads were its proprietary customer information. The Second Circuit found that most of the plaintiff's state law claims were preempted by the broad preemption provision in §1681t(b)(1)(A) of the FCRA External Site. The court affirmed the dismissal of the remaining, nonpreempted state law claims because they were inadequately pleaded.

REGULATION X - REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

Court rejects RESPA title insurance mark-up claim. Arthur v. Ticor Title Ins. Co. of Florida External Site, 569 F.3d 154 (4th Cir. 2009). The Fourth Circuit rejected the plaintiffs' claim in this class action suit that a title insurer who charges more for a title insurance policy than the insurer's filed rates violates §8(b) of RESPA External Site. Section 8 of RESPA prohibits kickbacks, referral fees, and unearned fees in connection with real estate settlement services. The Maryland insurance commissioner approved three rates for the insurer's title policies: an original issue rate, a reissue rate, and an extended coverage rate. The rate for an extended coverage policy was twice the rate for a reissue policy. The insurer charged the plaintiffs an extended coverage policy rate but should have charged the lower rate for a reissue policy. Relying on its previous ruling in Boulware v. Crossland Mortgage Corp. External Site, 291 F.3d 261 (4th Cir. 2002), and RESPA's statutory language, the court held that RESPA is not a price control statute and does not impose liability for overcharges as long as services are provided. Because it was undisputed that both the title insurer and its agents performed title insurance services, the court affirmed the dismissal of the RESPA §8(b) claim.