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THE IMPACT OF THE FAIR CREDIT REPORTING ACT ON YOUR ADVERTISING AND PROMOTION

by Gary Antoniewicz

"YOU HAVE BEEN PRE-APPROVED FOR UP TO $27,000 FINANCING ON YOUR PURCHASE OF . . ." Does this sound familiar? For years, marketing companies have been promoting mailings such as this for dealers to send to targeted individuals to generate traffic in their dealerships, especially for the sub-prime finance market. The targets for such mailings and promotions are generally persons living within certain zip codes and are selected by credit scores or recent bankruptcy discharges. Dealers seem to believe that such mailings are beneficial as they continue to utilize them on a regular basis often with mailings as large as 10,000 pieces.

Since the decision of the United States Court of Appeals for the Seventh Circuit in Cole v. U.S. Capital¹ in 2004, however, the legality of many of these targeted "Pre-Approved" offers have come into question. The issue raised in Cole is whether the offers made are "firm offers" of credit under the Fair Credit Reporting Act ("FCRA").² After the decision in Cole and several later cases, the sending of targeted "Pre-Approved" mailings by dealers on the Seventh Circuit (including Wisconsin, Illinois, and Indiana) is at best problematic. Numerous class action lawsuits have been brought against dealers under the FCRA with mixed results. With varying decisions by the Seventh Circuit Court of Appeals and a number of federal district courts interpreting Cole, no bright line has been drawn and it is difficult to give assurance to dealers as to whether a particular mailing is legal or not legal. It may well depend on the judge.

Dealers need to err on the side of caution when thinking about utilizing targeted "Pre-Approved" offers, and they need to understand the rules and risks involved.

Restrictions Imposed By the FCRA

The FCRA is a federal statute regulating "credit reporting agencies" and "consumer reports." Primary purposes of the FCRA are to ensure accuracy of consumer credit reports as well as privacy of consumer credit information -- to ensure access to consider credit information is limited to persons with a legitimate business interest. Usually, we understand that a dealer can access a consumer credit report, or "run a bureau," if a potential customer has applied for financing of a purchase. There are also several instances in the FCRA when consumer report information can be used even when no transaction has been initiated by a consumer. These instances include if:

. . . the transaction consists of a firm offer of credit or insurance.³

Dealers are permitted to use "consumer report" information to make an unsolicited "firm offer of credit." The FCRA defines a "consumer report" as:

. . . any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used . . . for the purpose of serving as a factor in establishing the consumer's eligibility for - (A) credit . . .⁴

Since a "consumer report" by definition has to be by a "consumer reporting agency" we also have to look at how this term is defined:

The term "consumer reporting agency" means any person which, for monetary fees, dues . . . regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information . . . .⁵

The definitions are broad and expansive. Credit reporting agencies can include more than the several credit bureaus we think of in processing loans and can include a number of companies assembling and selling targeted lists based upon credit scores or consumer characteristics. We should note that to be covered by the FCRA, there is a requirement that a credit reporting agency sell information to a third party. Thus, a dealer assembling its own targeted list based solely upon information obtained by the dealer, would not be covered by the FCRA even though the same list purchased from a credit reporting agency would be covered.

If a dealer sends out a mailing making an unsolicited "firm offer" of credit to a consumer, the dealer is required to make certain "clear and conspicuous" disclosures to the consumer that: information in the consumer's consumer report was used in making the offer; the consumer received the offer because the dealer was satisfied that the consumer met certain criteria and the offer may be withdrawn if the consumer no longer meets such criteria; the consumer has the right to prohibit the use of his/her consumer report in any transaction not initiated by the consumer; and an address and toll-free telephone number to notify consumer reporting agencies of this option.⁶ We have all seen this information footnoted at the bottom of mailers.

Finally, the FCRA provides that a person making an unsolicited offer of credit must maintain a file on the criteria used to select the consumer receiving the offer for a period of three years after making the offer.

The bottom line is that the FCRA does permit using consumer reports to make unsolicited "Pre-Approved" offers of credit providing the offer is "firm," required disclosures are made, and required records are kept.

Based on this language, marketing companies have sent millions of "Pre-Approved" solicitations. Disclosures are made in fine print and even if the mailing says the consumer is "Pre-Approved for up to $27,000," the footnote says there is a minimum guarantee of credit of $300.00. This is "firm," so no problem. Well, it turns out there is a problem, at least in the Seventh Circuit.

Cole Decision

In 2004, the U.S. Circuit Court of Appeals for the Seventh Circuit issued its decision in Cole v. U.S. Capital. The facts in Cole were similar to what is described above. Ms. Cole received an offer in the mail that she was pre-approved for up to $19,500 in automotive credit. The offer disclosed she must meet certain criteria, that she was guaranteed at least $300 for the purchase of a vehicle, and that interest rates could vary from 2.9% to 24.9% based on individual credit worthiness. Ms. Cole brought an action under the FCRA alleging the offer was not a "firm offer," but was a "sham." U.S. Capital argued that a "firm offer" meant that some amount of credit, however small, was guaranteed. The Seventh Circuit agreed with Ms. Cole and inserted a new term, "value," into the FCRA:

. . . The statutory scheme of the FCRA makes clear that a "firm offer" must have sufficient value for the consumer to justify the absence of the statutory protection of his privacy. A definition of "firm offer of credit" that does not incorporate the concept of value to the consumer upsets the balance Congress carefully struck between a consumer's interest in privacy and the benefit of a firm offer of credit for all those chosen through the pre-screening process. From the consumer's perspective, an offer of credit without value is the equivalent of an advertisement or solicitation . . . .⁷

The Court in its decision in Cole made clear that not just any offer will do to meet the "firm offer" requirement of the FCRA. The offer must have "value" to the consumer. The next question, how do you determine "value"? In agreeing with Ms. Cole that the offer made to her was a "sham," the Court gave its reasoning but left no clear guidelines on what "value" means:

. . . the relatively small amount of credit combined with the known limitations of the offer - that it must be used to purchase a vehicle - raises a question of whether the offer has value to the consumer. Finally, several material terms are missing from the offer. Although the offer indicates that interest rates may vary from 3.0 to 24.9 percent, the precise rate of interest for a particular consumer is unknown. Furthermore, the offer does not specify the method by which interest will be compounded nor the repayment period, although these factors are essential considerations in determining whether the offer has any value . . . .⁸

The Court leaves us knowing that a guaranteed amount of $300.00 is simply too low of an amount for the purchase of a car and has little "value" to the consumer. The Court also suggests that to have "value" the amount of credit must also include what appear to be truth-in-lending type disclosures of interest rate, payment and payment term.

The result of the Cole decision was a flood of class action filings in the Seventh Circuit seeking to obtain statutory damages and attorney fees under the FCRA for sham offers that had no terms and no "value" to the consumers.

Based upon Cole, decisions began to emanate from district courts that an offer is not "firm" if missing terms such as interest rates.⁹ In Murray v. Sunrise Chevrolet, Inc.,¹⁰ the U.S. District Court for the Eastern District of Illinois held that a "pre-screened" offer of an auto loan up to $19,500 failed to meet the Cole criteria for a "firm offer" because it failed to state a guaranteed amount.

In light of Cole, the question has become, what is value to a consumer? Does a dealer have to guarantee a large credit amount and provide truth-in-lending disclosures to qualify as a "firm offer"?

An Unattractive Offer Is Still Not Without Value

Following Cole the Seventh Circuit again addressed "value to a consumer" in Perry v. First National Bank,¹¹ a decision handed down in August 2006 regarding a pre-screened offer for a credit card. Thelma Perry sought statutory damages for herself and a class consisting of recipients of the offer saying that it lacked "value" under Cole. The credit card offer guaranteed $250.00 of credit. However, fees of $175.00 would be assessed to open the account leaving an initial available credit line of only $75.00. Perry argued that $175.00 in fees for $75.00 of credit lacked "value."

The Seventh Circuit (in a 2-1 decision) disagreed and distinguished the offer made to Ms. Perry from the offer made in Cole:

We recognize that First National's credit solicitation requires card holders to pay a significant amount of money in fees, which are quite high in relation to the credit line offered. We realize that this is not an attractive deal for the majority of consumers. However, the card is not without value. If the credit card holder paid off the card each month, the card would allow him or her to make almost $3,000 in purchases in one year. The credit card holder would also build up a credit rating, which is useful to individuals who are trying to establish credit for the first time or reestablish good credit. . . .¹²

In finding that the Perry offer was "firm," the Court also cited as distinguishing features that an interest rate of 18.9 percent was disclosed and that the low amount offered was not restricted in its use, such as only for an automobile purchase.

Now we know that an unattractive low amount of credit does not necessarily mean that an offer does not have "value" and is not a "firm offer." We are still not sure how low you can go for automobile credit, but know the offer has to be significant enough to assist a consumer in actually purchasing a vehicle.

Perry however, did not end uncertainty for lenders. In March 2007, the U.S. District Court for the Northern District of Indiana issued a decision in Bonner v. Home 123 Corporation,¹³ again addressing the criteria set forth in Cole. The solicitation by Home 123 was for home loans from $50,000 to $750,000 with a minimum loan of $50,000. The first reason set forth by the Court for finding the offer was not a "firm offer" was a lack of terms:

. . . Defendant's mailings do not include any crucial terms, such as interest rate percentage, or a range of interest rate percentages, whether the offer is for a fixed or variable rate mortgage loan, a reasonable estimate of an amount of the loan, the length of the loan, how the loan was to be repaid, or any applicable fees.¹⁴

A second reason given for determining the offer was not a firm offer was that a consumer could not determine any value from the "four corners" of the offer. No firm amount or terms were available until after the consumer went through a credit application and qualification procedure:

We fail to see how a meaningful offer of credit could work in any other way. Otherwise, the consumer (or for that matter, the Court) cannot evaluate the offer because he does not know the value until after completing the extensive application process and finally receiving a loan amount with its corresponding terms.¹⁵

So, how many terms must be stated in an offer for the consumer to evaluate it to determine value? Is an amount and an interest rate alone sufficient? How big must the amount be if the offer relates to the purchase of a vehicle?

What is certain is that no bright line rule has been established and that each offer may be subject to scrutiny no matter what terms are stated.

What is a Consumer Report

While still trying to come to grips with what is "value to a consumer," a decision in July 2007 by the U.S. District Court for the Eastern District of Wisconsin in Reynolds v. LeMay Buick-Pontiac-GMC-Cadillac, Inc.¹⁶ takes us back to another basic element, what is a "consumer report" under the FCRA.

In 2005, LeMay hired a marketing firm to send a mailing advising recipients that they were pre-approved for an "automobile loan with a credit line of up to $24,970.00." The marketing firm, Cactus Marketing, purchased a list of people recently emerged from bankruptcy in certain geographic areas from a firm called ClickData who had compiled the list from public records.

The Court held that just because the list provided information about consumers, LeMay was not necessarily subject to the FCRA:

Not all reports containing information on a consumer are "consumer reports."¹⁷

In reasoning that such reports are not subject to the FCRA, the Court looked at how such information was used. The Court noted that under the FCRA, a "consumer report" is information from a "consumer reporting agency" which is used or expected to be used for the "purpose of establishing the consumer's eligibility for credit."¹⁸ The Court stated:

LeMay did not use the bankruptcy list for the purpose of serving as a factor in establishing Reynolds' eligibility for credit. LeMay only used the bankruptcy list to identify the names and addresses of potential customers to whom mailers should be sent. . . .¹⁹

The Court did not address whether determining who may be "potential customers" is the same as determining "eligibility for credit." This is one of the first cases addressing what is a "consumer report" for purposes of the FCRA. While helpful, the issue has not yet been addressed by the Seventh Circuit. This one case should not be relied on as a blanket "ok" to use all bankruptcy lists for solicitation. Certainly bankruptcy lists are preferable to credit scored lists sold by credit bureaus. The safest list is one compiled by the dealership from service customers, prior customers or persons shopping the dealership.

Conclusion

After Cole, can a dealer send out a mailing advising customers they have been "pre-approved" for financing? The answer is yes, as long as the mailing complies with the FCRA or is exempt from the FCRA. The problem is that we are not quite sure what terms are sufficient to comply with the FCRA and are not quite sure what constitutes a "consumer report" under the FCRA.

If asked to design a safe complying offer, I would say it would be as follows:

You are guaranteed $10,000 financing toward the purchase of a car with $2,000 down, 18 percent financing for 48 months.

That offer has value: the amount is sufficient to actually buy a vehicle and the basic terms are stated with certainty. The consumer has information sufficient to evaluate the offer. If such a guarantee cannot be made, then questions arise as to whether this is the type of marketing program a dealer should engage in.

Dealers should have their marketing letters and mailings reviewed by counsel knowledgeable in consumer laws prior to sending them, not after a lawsuit has been served. Dozens of lawsuits have been filed against dealers in the Seventh Circuit since the Cole decision and the risks to dealers are high. The FCRA cases are still developing and are uncertain. Dealers are urged to use caution and not just send anything a marketing agent recommends.

1. Cole v. U.S. Capital Incorporated, 389 F.3d 719, 2004 U.S. App. LEXIS 24177 (7th Cir. 2004)
2. 15 U.S.C. §§ 1681a, et seq.
3. 15 U.S.C. § 1681b(c)(1)(B)(i)
4. 15 USC § 1681a(d)(1)
5. 15 USC § 1681a(f)
6. 15 USC § 1681m(d)(1) and (2)
7. 389 F.3d at 726, 727
8. 389 F.3d at 728
9. Asbury, et al. v. People's Choice Home Loan, Inc., No. 05C 5483 (N.D. Ill. 2/15/06)
10. Murray v. Sunrise Chevrolet, Inc., 441 F.Supp. 2d 940, 2006 U.S. Dist. 5336 (N.D. Ill. 2006)
11. Perry v. First National Bank, 459 F.3d 816 2006 U.S. App. LEXIS 21689 (7th Cir. 2006)
12. 459 F.3d at 825
13. Bonner v. Home 123 Corporation, 2007 U.S. Dist. LEXIS 18006 (N.D. Ind. 2007)
14. 2007 U.S. Dist. LEXIS 18006 at *17
15. 2007 U.S. Dist. LEXIS 18006 at *19
16. Reynolds v. LeMay Buick-Pontiac-GMC-Cadillac, Inc., 2007 U.S. Dist. LEXIS 55641 (E.D. Wis. 2007)
17. 2007 U.S. Dist. LEXIS 55641 at *6
18. 2007 U.S. Dist. LEXIS 55641 at *6
19. 2007 U.S. Dist. LEXIS 55641 at *4