WASHINGTON — Last week's Supreme Court decision outlining companies' liability under the Fair Credit Reporting Act should aid the cases of banks and other companies accused in 198 pending lawsuits of willfully violating the law, industry lawyers said.
The unanimous decision ultimately could save banks and others billions of dollars, said Richard Fischer, a partner with the law firm of Morrison & Foerster.
Though lawyers agree the decision will help the defendants, they disagree on how much. Some argue it is more likely banks and other companies will get the cases dismissed, while others say the ruling may just result in lower damages.
"It will be harder to get full damage amounts that the plaintiffs are seeking, because their burden of what they have to prove has just been redefined," said Helen Foster, a lawyer at Manatt, Phelps & Phillips LLP.
"But it will be case by case, because what the plaintiffs were alleging and how much willful behavior was on the table are a case-by-case action," she said. "It's not going to impact the merits of those case … it's just going to impact how much damages they get."
But Mr. Fischer said he sees a broader impact.
"The Supreme Court raised the bar of what it means to prove reckless" disregard of the law, he said. "That's very good news for financial institutions, particularly if you are dealing with a statute like the Fair Credit Reporting Act. It's not clear. It's very complicated and very confusing."
The high court ruled June 4 that a lender is in willful violation of the fair-credit law only if it has knowingly violated the statute or acted in reckless disregard of it. Importantly, the court also defined reckless disregard, saying it did not apply when a company had acted under a "reasonable reading" of the law.
Though there are thousands of cases dealing with the FCRA, 253 have turned on so-called firm credit offers, or prescreening offers, in which a lender offers credit based on general terms but changes those terms once a borrower applies, because of the borrower's specific credit history. Some borrowers have alleged a violation of the FCRA as a result, because the terms under which they applied are not what they receive.
Mr. Fischer said these cases are particularly difficult for banks to fight because the FCRA's provisions are unclear. Still, though the terms are vague, the penalty is not. Any company that willfully violates the law faces statutory damages of up to $1,000 per customer.
"It could mean if you send out 50 million prescreened solicitations a year, put three zeroes behind it and that will give you an idea what the dollars are," Mr. Fischer said.
So far none of the cases have made it to trial, though 55 have been settled or dismissed. The defendants include nearly all the major banking companies or their subsidiaries, including Citigroup Inc., Wells Fargo & Co., Bank of America Corp., JPMorgan Chase & Co., Washington Mutual Inc., and Capital One Financial Corp.
The Supreme Court case turned on provisions of the FCRA that require businesses to alert customers of any "adverse action" taken against them because of information in their credit reports and that subject those who willfully ignore the requirement to punitive damages.
The defendants, Safeco Insurance Co. of America and Geico General Insurance, argued that they should not have to notify all customers who would have received a better rate had their credit scores been perfect. Disclosure is required under the law only when a low credit score prompts an "adverse action."
Justice David Souter wrote in the opinion, "A company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless."
The court also noted that some parts of the FCRA are unclear and left open to interpretation by companies. Though Safeco's interpretation of the law was incorrect, it was not "objectively unreasonable" when it was made and thus could not be deemed reckless, the court said.
That wording gives lenders considerable latitude to interpret the law, lawyers said.
"It provides the clarity that has been lacking on what is a willful violation of the Fair Credit Reporting Act," said Anne Fortney, a partner at Hudson Cook. "I think [the Supreme Court decision] gives lenders the flexibility they need when interpreting unclear provisions of the act."
But Gil Schwartz, a partner at Schwartz & Ballen LLP, said the decision may also force lenders to count more on outside counsel for guidance to send out credit notices in accordance with the FCRA.
"My feeling is the end result is businesses are going to have to rely much more heavily on lawyers and people with expertise in the area to review actions that determine whether or not they may be interpreted as reckless or whether or not they are reasonable interpretations of what the FCRA means," Mr. Schwartz said. "And it's not just in the area of adverse actions — it's any area in the FCRA. For example, if you are doing prescreening and want to take a determination of prescreening, that's just as much up to a determination of willful violation as any other provision."
Some observers are hoping for more guidance on adverse actions and how to treat prescreened offers.
Justice Souter noted in the Safeco ruling that lenders and other companies lack clear guidelines from the courts or federal regulators.
The Federal Trade Commission has not provided commentary on the FCRA since 1990, but is working on an update, according to Joel Winston, associate director of the agency's division of privacy and identity protection.
Observers are hoping the federal banking and thrift regulators will follow suit.
"Of all the agencies that have enforcement responsibility — of all the federal agencies over the Fair Credit Reporting Act — the only one that does not have rulemaking authority is the Federal Trade Commission," Ms. Fortney said. "So the Federal Reserve Board, the … [Office of Comptroller of the Currency], the other federal regulatory agencies do have rulemaking authority. They have authority to issue interpretations pursuant to that rulemaking authority. … So I would personally like to see the banking agencies step up and start providing some guidance on some of these issues."
Ms. Foster, a former FTC lawyer who briefly worked on the agency's commentary, agreed.
"They could put out guidance that would be more helpful to their regulated financial institutions," she said.
"The FTC guidance is very useful, but what would be more useful would be for the bank agencies to also opine."
