• The Federal Credit Reporting Act Requires Notice of an Adverse Action if the Report Detrimentally Affects the Consumer's Position
  • July 11, 2007 | Author: Geoffrey T. Tong
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • In two related cases, the U.S. Supreme Court held that the Fair Credit Reporting Act ("FCRA" or the "Act") requires insurance companies to provide notice of an "adverse action" to a consumer if the credit report places the consumer in a worse position than other relevant facts would have done. For example, the notice is required if the credit report resulted in a higher premium rate than would have been charged had the company not considered the report in determining the premium. The Supreme Court also held that the notice requirement applies to actions undertaken with regard to a consumer with whom the insurer has no preexisting relationship, such as a new applicant for insurance.

    The FCRA was enacted in 1970 to promote fair and accurate credit reporting, promote efficiency in banking, and protect consumer privacy. The Act requires notice to a consumer subjected to "adverse action . . . based in whole or in part on any information contained in a consumer report[]," such as a credit report.1 As applied to insurance, an "adverse action" is "a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for."2

    The FRCA provides a private right of action against a company that fails to comply with its requirements. If the violation was "negligent," the prevailing consumer is entitled to recover actual damages. If the violation of the notice requirement was "willful," the consumer is entitled to recover actual, statutory, and possibly punitive damages.3

    The Court decided the cases of Safeco Insurance Co. of America v. Burr, 551 U.S. ____ (2007) and GEICO General Insurance Co. v. Edo, No. 06-100 together, issuing one majority opinion. In GEICO, the company used an applicant’s credit score to select the subsidiary to which a risk was assigned and the premium to be charged. The company provided notice of an adverse action if an applicant’s credit score caused the consumer to be placed in a higher premium tier or be assigned to a different subsidiary than had the applicant had a "neutral credit score," a credit score that would have no effect on the rate or assigned subsidiary. GEICO did not notify an applicant if it would have been offered better terms with a better credit score than the applicant’s actual score.

    Plaintiff Ajene Edo ("Edo") applied for auto insurance with GEICO, which offered him a standard policy and a rate higher than the "most favorable" rate, which he accepted. GEICO did not provide Edo with an adverse action notice because he had a "neutral credit score," meaning that it had no effect on either the selection of the subsidiary which issued his policy or his rate. Edo filed a proposed class action against GEICO, alleging willful failure to provide notice of an adverse action in violation of the Act. Edo claimed no actual harm but sought statutory and punitive damages.

    In Safeco, the company similarly relied on credit reports to determine initial premium rates. Safeco did not provide a notice of adverse action to new applicants for insurance for whom insurance had been approved, regardless of the premium, because it did not believe that this constituted an adverse action because there were nor prior Safeco rates involved. Similarly, Safeco did not provide notice to an applicant who had been approved for insurance but who would have received a better premium if the consumer had a better credit score.

    Safeco approved Plaintiffs Charles Burr’s and Shannon Massey’s applications but offered them premium rates higher than the "best rates possible" because of their credit scores. Safeco did not provide them with adverse action notices. They joined a proposed class action against Safeco, alleging a willful violation of Section 1681n(a) by Safeco.

    In reaching its decision, the Court initially determined that the FRCA’s notice requirement can apply to initial rates charged to a new applicant for a policy, such as when the applicant is charged an "increased rate" because of a credit score, holding that the increase is an adverse action. The Court construed increased rate to mean that the consumer’s credit score caused the insurer to charge the applicant a higher rate than the baseline rate, which is the rate that the applicant would have been charged if the company had not considered the credit report in determining the rate. Notice is required when the credit report adversely affects the initial rate for the insurance; i.e., the report places the consumer in a worse position than other relevant facts would have done.

    Conversely, if the credit report has no identifiable effect on the rate, the Court held that no notice is required because the consumer has "no immediately practical reason to worry about it" as both the company and the consumer are in the same position where they would have been if the company had never evaluated the report.

    The Court believed that Congress was more concerned with the practical question of whether the consumer’s rate actually suffered when the company considered his or her credit report rather than the theoretical question of whether the consumer would have gotten a better rate with perfect credit. Consequently, the Court reasoned that "it makes more sense to suspect that Congress meant to require notice and prompt a challenge by the consumer only when the consumer would gain something if the challenge succeeded."

    Reckless Disregard of the Notice Requirement Is Sufficient to Constitute a "Willful" Violation of the Act

    The Supreme Court also addressed the issue of the level of conduct that constitutes "willful" failure to comply with the FRCA’s notice requirement. The Court rejected the argument that willful failure required a knowing or intentional violation of the Act. It held that willful failure includes a violation committed in reckless disregard of the notice requirement. The Court adopted its common law usage in civil cases, which treated reckless disregard of the law as a willful violation.

    In summary, the Supreme Court, by addressing the notice and willful violation aspects of the FRCA, clarified the obligations of an insurer to provide a notice of adverse action when it considers a consumer’s credit score to determine the risk and the premium it will charge and when the company may face liability for statutory and punitive damages for failing to comply with the notice requirements.

    1 15 U.S.C. § 1681m(a).
    2 15 U.S.C. § 1681a(k)(1)(B)(i).
    3 15 U.S.C. § 1681o(a), n(a).