"Firm Offer" Litigation: A Mixed Bag
If you have been following these pages, you will recall that the "firm offer" class action cases are this century’s "Rodash"—taking a hyper-technical interpretation of a consumer protection statute and threatening creditors with potentially ruinous
exposure. In this case, the statute is the Fair Credit Reporting Act ("FCRA"), and the claim is that creditors who make improper
use of consumers’ credit profiles in order to solicit customers through a pre-screened solicitation have violated the FCRA.
No one is harmed by these infractions. Still, the potential billions of dollars in exposure gives one pause.
On August 25, the Seventh Circuit issued its latest decision involving "firm offer" challenges under the FCRA. In the first
part of Perryv.First National Bank, the Seventh Circuit held that the FACTA eliminated any private right of action to sue for violations of 15 U.S.C. § 1681m.
While the initial wave of firm offer cases alleged violations of the "opt-out" disclosure requirements found in section 1681m,
that loss of the right for plaintiffs to sue will also apply under the court’s reasoning to the FCRA’s adverse action notice
obligation found in that same section. The facts in Perry, however, did not require the court to decide whether the loss of the right to sue applies to transactions occurring before
FACTA’s effective date (Dec. 2004), an issue on which district courts have divided.
Even more significantly, Perry agreed that plaintiff could not claim in that case that the credit card product at issue was something other than a firm
offer of credit. Defendant First National’s solicitation survived for three reasons: (a) it did not equivocate on preapproval,
(b) it disclosed a specific interest rate, and (c) it offered a minimum credit amount which could be used for any number of
product purchases, not just a car at one dealership. These three factors were described by the Perry majority (one judge dissented) as the core of the Seventh Circuit’s holding in the infamous Cole case. Although Perry did not limit Cole’s minimum value analysis to circumstances where the credit offer was tied to a product sale such as a car, the majority did
say that such product ties-ins are one of the "factors" to consider when deciding if an offer is a "sham."
Meanwhile, district courts around the country continue to divide in their analyses of firm offer cases. Some outside the Seventh
Circuit have rejected the core claim by plaintiffs that, unless all the pricing terms are finally set in the initial mailer,
there was no firm offer extended. See, e.g., Sorokav.Homeowners Loan Corp., 2006 U.S. Dist. LEXIS 38847, at *11-12 (M.D. Fla. June 12, 2006) (dismissing claim based on solicitation which "lacked
an interest rate, method of computing interest and term of the loan" because, among other things, "the definition of ‘firm
offer of credit’ within the FCRA contemplates an ongoing process of exchange of information and verification"). Several others,
though, have found FCRA violations where a given credit card or mortgage mailer did not disclose the final interest rate,
credit amount, or method of computing interest.
The money issue in these cases remains willfulness. It is the only claim plaintiffs have been able to certify, because it
allows a plaintiff to elect statutory damages of $100 to $1,000 instead of highly individualized actual damages. And unlike
other consumer protection statutes (e.g., TILA), there is no cap on the statutory damages recoverable in a class action. The
good news is that, even within the Seventh Circuit, one of the few courts to have reached the willfulness liability issue
threw out the claim, finding that Cole articulated a "fluid" set of legal standards and that plaintiffs would have to come up with more than just evidence that
defendant breached these FCRA requirements to establish a willful claim. Murrayv.New Cingular Wireless Services, Inc., (N.D. Ill. May 22, 2006).
Going forward, the primacy of the willfulness issue, together with the continued legal uncertainty surrounding firm offers,
places a premium on companies’ being able to document a good-faith effort to review their prescreen activities for compliance
with the FCRA.
For more information, contact Michael Agoglia at magolia@mofo.com.
HUD Announces RESPA Settlements
On July 18, HUD announced its first settlements, totaling $1.6 million, of Real Estate Settlement Procedures Act ("RESPA")
charges involving payments made to captive title reinsurance companies. HUD reached settlements with national mortgage lender
CitiMortgage, Inc. and homebuilders M.D.C. Holdings, Inc. (Richmond American Homes) and WL Homes (John Laing Homes), and their
various captive title reinsurance companies. The companies cooperated in HUD’s investigation, and in addition to the settlement
payments, they agreed not to enter into any new captive title arrangements and to cease writing new captive title reinsurance
business. As we have previously reported, some states recently have reached substantial settlements with a number of title
companies over allegations of illegal payments in the title insurance industry, including payments to captive title reinsurers.
HUD views any captive title reinsurance arrangements in which payments are not bona fide and exceed the value of the reinsurance
as a violation of RESPA, and it is particularly concerned when captive title reinsurance arrangements involve an entity that
is in a position to refer business to the primary title insurer.
HUD Proposes Definition of "Predatory" for GSEs
It’s an election year, as if we needed reminding. So, HUD has proposed to define predatory practices for purposes of proscribing
predatory lending purchases by Fannie Mae and Freddie Mac and rendering them ineligible toward the agencies’ affordable housing
goals. The Proposal would amend the definition of "mortgages with unacceptable terms and conditions or resulting from unacceptable
practices" and "mortgages contrary to good lending practices" in 24 C.F.R. § 81.2. Mortgages that meet these definitions are
ineligible for goals credit. Under the Proposal, the Secretary of HUD would be permitted to add to the list of "good lending
practices" or the list of "unacceptable terms and conditions or resulting from unacceptable practices" by initiating a notice
and comment period.
For further information, contact Joe Gabai at jgabai@mofo.com.
HMDA on the Hill
Federal Reserve Board Governor Mark Olson’s June 13 testimony before the House Financial Institutions Subcommittee hearing
about the 2004 HMDA (Home Mortgage Disclosure Act) data had some predictable fireworks. It is the rare Congressperson that
can pass up a good sound bite opportunity, and Rep. Barbara Lee (D-Cal.) did not disappoint, declaring that the HMDA data
show that "[i]t’s very clear that the American dream is becoming a nightmare for so many Americans." Although Governor Olson
conceded that the HMDA data were "disturbing," he reiterated in his testimony that the data were not sufficient to show discrimination
in loan pricing because the data do not reflect borrowers’ credit scores or lenders’ underwriting and risk-based pricing methods.
