Consumer Compliance Outlook: Fourth Quarter 2010

On the Docket: Recent Federal Court Opinions


Circumstances justifying HELOC suspension. Schulken v. Washington Mutual Bank, Henderson, NV, 2010 WL 3987680 (N.D. Cal. Oct. 12, 2010). PDF Plaintiffs obtained a home equity line of credit (HELOC) from Washington Mutual Bank (WaMu) in 2005 for $250,000. (WaMu was later acquired by JP Morgan Chase (Chase), which was also named as a defendant in the lawsuit.) On March 13, 2009, WaMu asked plaintiffs to provide a copy of a recent paystub and an authorization form so that WaMu could obtain their tax returns for income verification purposes. Plaintiffs provided financial information several days later but did not provide paystubs because they are self-employed. On March 18, 2009, WaMu notified plaintiffs that their account had been suspended because WaMu could not verify that their income was sufficient to support the HELOC. Plaintiffs' class action lawsuit alleged several violations of the TILA and Regulation Z, and Chase filed a motion to dismiss. First, Chase argued that the TILA and Regulation Z permit a suspension for a material change in a consumer's financial circumstances. The court rejected this argument because a creditor's inability to verify a borrower's income is not a recognized basis under §226.5b(f)(3)(vi) for suspending a HELOC. Chase also argued that Regulation Z permits a suspension for a breach of material obligations and that a creditor can specify the material obligations in the HELOC agreement. The court rejected this argument because although the HELOC agreement stated that failure to provide a current financial statement would constitute a material breach, it did not specify that failing to provide paystubs or a form authorizing release of tax returns would do so. Additionally, the plaintiffs provided many pages of financial information in response to WaMU's request. The court also rejected Chase's attempt to dismiss plaintiffs' claim that the March 18th change-in-terms notice was deficient. The court found that a HELOC suspension notice that relies on an impermissible basis for the suspension was a potential violation of Regulation Z. The court did grant Chase's motion to dismiss a claim arguing that the March 13, 2009 letter violated Regulation Z's change-in-terms notice requirements. The court held that this letter was not a change-in-terms notice.


Duties of consumer reporting agency for information in consumer report. Cortez v. TransUnion, LLC, 617 F.3d 688 (3d Cir. 2010). PDF External Link In a case of first impression, the Third Circuit held that an alert in a consumer reporting agency's (CRA) records indicating that a consumer's name matched a name on the Treasury Department's Specially Designated Nationals (SDN) list is subject to the FCRA's reporting requirements. Before shopping for a car loan, the plaintiff obtained her TransUnion credit report, which showed a high credit score and did not reveal an alert on her file for the SDN list. The Treasury Department maintains the list to identify individuals and businesses whose assets are blocked (such as terrorists) and whom individuals and organizations are prohibited from dealing with under the PATRIOT Act and its implementing regulations. When the plaintiff applied for a car loan, the car dealership notified her of the SDN alert on her TransUnion report, causing her to wait several hours while the dealership investigated and contacted the FBI. The dealership later approved her loan after determining that she was not the person on the list because the plaintiff's name (Sandra Jean Cortez) and birth date were different from the name (Sandra Cortez Quintero) and birth date of the person on the SDN list. The plaintiff subsequently contacted TransUnion four times to dispute the SDN listing and was assured that it did not appear on her file. However, when she later attempted to rent an apartment, she learned that TransUnion had not removed the alert, and she sued TransUnion for violating the FCRA. A jury awarded $50,000 in compensatory damages and $750,000 in punitive damages, but the trial court reduced the punitive damages to $100,000. On appeal, the Third Circuit affirmed the $150,000 verdict, finding that TransUnion: 1) violated §1681e(b) by failing to have reasonable procedures in place to recognize the birth date and name discrepancies; 2) violated §1681g by failing to list the SDN alert on the credit report TransUnion provided to the plaintiff; 3) violated §1681i by failing to reinvestigate the SDN alert after the consumer disputed it; and 4) violated §1681i(b) by failing to note in the consumer's file that she continued to dispute the SDN alert after receiving TransUnion's response. TransUnion argued that it was not required to include the information in the plaintiff's credit report because a third party provided it, and the SDN alert was not subject to the FCRA's reporting requirements. The court rejected this argument, finding that a CRA must report information in its files that affects a consumer's eligibility for credit. Because a match on the SDN list renders a consumer ineligible for credit under the PATRIOT Act, and the information was in TransUnion's files, the court held it was subject to FCRA reporting requirements. The court found further that the use of a third party to obtain the SDN information did not negate TransUnion's reporting obligations.

Furnisher's duty to investigate disputed information. Chiang v. MBNA, 620 F.3d 30 (1st Cir. 2010). PDF External Link The plaintiff alleged that MBNA erroneously reported to the consumer reporting agencies (CRAs) that he was delinquent on his credit card account and that MBNA violated §1681s-2(b)(1) of the FCRA because it failed to investigate when he disputed the delinquency report. The court noted that under §1681s-2(b)(1), a furnisher is required to investigate disputed information only when it receives notice of the dispute from a CRA and is not required to investigate a dispute filed directly by the consumer. The plaintiff was unable to submit any credible evidence at trial that the CRAs had notified MBNA of a dispute. The First Circuit therefore affirmed the dismissal of the case. It should be noted that Congress amended §1681s-2(b)(1) to require the federal banking agencies to issue regulations allowing consumers to file direct disputes with furnishers. In July 2009, the agencies issued those regulations, which became effective July 1, 2010. The Third Quarter 2010 issue of Outlook discussed the obligations of furnishers under the new direct dispute rules.


Discrimination case standards to survive a motion to dismiss. Swanson v. Citibank, N.A., 614 F.3d 400 (7th Cir. 2010). PDF External Link A divided panel of the Seventh Circuit held that a discrimination case under the Fair Housing Act (FHA) survives a motion to dismiss and proceeds to discovery as long as the plaintiff states a claim that is “plausible on its face” to satisfy the legal requirements for an FHA claim. The plaintiff, an African American, applied for a home equity loan with Citibank, which conditionally approved a $50,000 loan based on the plaintiff's estimate that her house was worth $270,000. But when the bank's appraiser later valued the property at only $170,000, Citibank denied the loan. Two months later, the plaintiff had an appraisal done that valued her home at $240,000. The plaintiff sued Citibank and the appraisal company for violating the FHA, alleging that they disfavored making loans to African Americans and deliberately lowered the appraisal value of her home to provide a pretext for denying the loan. The Seventh Circuit reversed the trial court's dismissal of the case, holding that the plaintiff's complaint identified the type of discrimination (racial), by whom (Citibank and the appraiser), and when (in connection with her application for a home equity loan), which was sufficient to allow the case to proceed to the next phase, in which the plaintiff could obtain discovery to further support her claims. The court emphasized, however, that while the plaintiff alleged sufficient facts to survive a motion to dismiss, she would need more evidence of discrimination than a mere discrepancy in two appraisals to ultimately prevail on her claims.