Firm Offers of Credit: Complying with FCRA after Cole and FACTA

1. Firm Offers of Credit: Complying with FCRA after Cole and FACTA Richard E. Gottlieb Dykema Gossett PLLC, Chicago

2. Relevant FCRA provisions Cole v. US Capital (7th Cir. 2004) and related litigation Compliance guidance Outline of Presentation

3. Part One: RELEVANT FCRA PROVISIONS

4. Firm Offer Basics Under FCRA, credit reports may be accessed without consumer permission for transaction that consists of �firm offer� of credit. Elements of firm offer: prescreening creditworthiness established before consumer is selected; actual creditworthiness criteria (if different from prescreening criteria) must be established before consumer is prescreened; and offer must be honored if consumer responds to offer and meets pre-established creditworthiness criteria.

5. In Dec. 2004 report, Federal Reserve Board concluded that prescreening: Reduces search costs by providing consumers with ready information about product availability and pricing tailored more closely to their financial experiences and needs. Increases likelihood that consumers will qualify for the product or service being offered and reduces possibility that consumer will be wasting his or her time and effort when responding to a mailing. Promotes competition and enhances consumer welfare in the markets for credit and insurance  Prescreening Benefits Consumers

6. FCRA, Pub. L. 91-508 (1970) Amended several times since 1970 Enacted to promote accuracy, fairness, and the privacy of personal information assembled by Credit Reporting Agencies (�credit bureaus� or �CRA�s�) Limits permissible uses of consumer data (�consumer reports�) Background: Fair Credit Reporting Act, 15 U.S.C. 1681 et seq.

7. �Firm offer of credit� is defined as any offer of credit or insurance to a consumer that will be honored if the consumer is determined, based on information in a consumer report, to meet the specific criteria used to select the consumer for the offer.  �Firm Offer of Credit� � 15 USC � 1681a(L)

8. Firm offers may be conditioned on at least the following: (1) creditor may apply additional pre-selected criteria not in the consumer report, including any criteria bearing on creditworthiness; (2) creditor may require verification that consumer meets the prescreen criteria; and (3) creditor may be required to meet collateral requirements established before the offer and disclosed within the offer But� Firm Offer is Really a �Conditional� Firm Offer � 15 USC 1681a(L):

9. Consumer reports may be furnished by a CRA to a third party: In response to a court order By written instructions of the consumer For transaction consisting of firm offer of credit or insurance (15 U.S.C. 1681b(c)(1)) In connection with an employment application Or for other specifically enumerated purposes not relevant here (such as child support enforcement) Permissible purposes of consumer reports � 15 USC � 1681b

10. Part Two: COLE DECISION AND RELATED LITIGATION

11. Arose out of offer for combined auto loan and credit card: �You are pre-approved to participate in an exclusive offer from U.S. Capital and Jerry Gleason Chevrolet.� Notes consumer is eligible to "receive a Visa or MasterCard with limits up to $ 2000 as well as up to $ 19,500 in AUTOMOTIVE CREDIT!� However: Only a $300 line of credit was truly guaranteed Required disclosures were in just 6-point font  Cole v. U.S. Capital, Inc. 389 F.3d 719 (7th Cir. 2004)

12. Reverses grant of 12(b)(6) motion Pleadings reasonably supported claim that offer was a sham made to justify access to her consumer credit reports Solicitation failed under any test of conspicuousness to make required disclosures in a clear and conspicuous manner. Cole holding

13. Rejects argument that court may determine nature of firm offer from the solicitation letter alone: �To determine whether the offer of credit comports with the statutory definition, a court must consider the entire offer and the effect of all the material conditions that comprise the credit product in question.� Cole court: Must Look Beyond Initial Written Communication

14. In addition to express FCRA requirements, �firm offer� must further offer sufficient value to justify privacy violation caused by accessing consumer�s credit report �an offer of credit without value is the equivalent of an advertisement or solicitation.� 389 F.3d at 727  Cole: Not just any firm offer will do

15. Early complaints filed initially by Edelman Combs firm in Chicago (which is pursuing Cole) Others (like James Hoyer firm) have since joined the fray Suits filed primarily in 7th and 9th Circuits Edelman firm typically seeks narrow class (statewide or even countywide) Others have sought nationwide classes Cole decision has spawned over 150 new putative class actions

16. Plaintiffs typically seek �appropriate damages� and attorneys� fees for WILLFUL violation of FCRA ($100-$1,000 per violation). Example: 1 million letters = $1 billion potential damages. No claim of any actual damages. No claim of negligent violation. Omission of negligence claim is intentional: actual damages are highly speculative Proving actual damages for each plaintiff would require mini-trials Relief sought

17. Most recent appellate pronouncement on prescreened offers of credit Arose out of interlocutory appeal of denial of class certification District court had refused to allow parties to settle case on class basis, and attacked Edelman firm and its �professional� plaintiff Murray v. GMAC Mortgage, 434 F.3d 948 (7th Cir. 2006)

18. Reverses district court�s denial of class certification and settlement But. . . Suggests that proposed deal (fund averaged $1 per class member with $3,000 to class rep) was improper Holds that court must examine the �four corners of the offer� to determine whether offer has sufficient value Query: does this mean �four corners� of the initial written communication, or of the transaction as a whole? Murray holdings

19. Most suits involve mass mailings in millions Class notice alone would cost many millions of dollars Murray v. GMAC Mortgage (7th Cir. 2006): suggests settlement funds averaging $1 per class member are per se unreasonable Although they provide value to the class, cash replacements (e.g., free credit reports) will be highly scrutinized post-CAFA Can These Cases be Settled on Class Basis?

20. Part Three: COMPLIANCE TIPS

21. Always do a targeted prescreening Document your marketing plan No general solicitations Make the letters as specific as possible Provide sufficient value Don�t add conditions to the offer not expressly allowed by FCRA Consumer should receive a specific firm offer Monitor the process on the back end Eight Compliance Tips

22. Prescreening consumers through the credit liaison should be done with reference to a particular loan program or credit offer Prescreen must match the firm offer, i.e., never prescreen a broader segment than the group to whom you are prepared to make the firm offer 1. Do a Targeted Prescreening.

23. Maintain marketing plan detailing specific offers or loan program for which prescreening was conducted and documentary evidence showing the prescreening criteria used for credit programs Develop internal documents showing specific creditworthiness criteria established before prescreening 2. Have a Documented Marketing Plan

24. The offer letters should not be used for general solicitation purposes but for specific offers. Adopt policies and procedures governing how the mail pieces may be used to solicit customers. 3. Offer Letters should ideally be targeted solicitations 

25. FCRA does NOT require that all of the terms and conditions be in the offer. However: Cole and its progeny may be read to require greater specificity Safe harbor: put as much information as possible (even if just in the fine print on the reverse) Consider including a baseline offer � with all material terms � in the fine print 4. Make the offer letter as specific as possible

26. Cole grafts �value� analysis to all firm offers Make sure that the offer is sufficient to justify invasion of privacy rights Example: Guaranteeing an unsecured credit line of $500 as an excuse to make a mortgage solicitation will probably fail the sniff test in the 7th Circuit 5. Provide sufficient value

27. You may apply standard criteria bearing on creditworthiness; and You may require verification of prescreen criteria. BUT never add new conditions after the fact, or change the conditions that justified the prescreen AND never state that �offer may be withdrawn� or that �terms are subject to change� 6. Don�t add conditions Not contemplated by FCRA

28. When the consumer responds to the solicitation, either by telephone, in person, or otherwise, s/he should receive a detailed offer of credit once the conditions of the offer are satisfied. Consider use of detailed scripts DO NOT use the offer letter as a general solicitation 7. Ensure Consumer receives �firm offer� on response

29. Make sure consumers are receiving the �firm offer� if they satisfy your preconditions Consider scripts for telephone solicitations Retain and analyze data on response rates, number of applications received, approved and declined If applicant received a different offer, document record to show consumer wanted different credit than original offer 8. Monitor the process on the back end

30. THANKS!! Email: rgottlieb@dykema.com Questions?