CHICAGO – November 1, 2006 – Over the past two years, there have been over one hundred lawsuits challenging prescreen offers of credit issued by mortgage and automotive lenders. Most of these lawsuits have been filed by the Chicago-based law firm of Edelman, Combs, Latturner & Goodwin. New class action specialists have joined in such as James, Hoyer out of Tampa, FL. The lawsuits have spread from the Midwest, mostly Illinois to the rest of the country including several suits in Texas, California and Virginia.

It is important for financial services marketers to be aware that the laws concerning consumer privacy are constantly in flux. Keeping abreast of the recent lawsuits in this area is essential in order to remain compliant with changing FCRA regulations and privacy compliance laws.

Many lenders who cannot keep track of the current legal proceedings have ceased sending pre-approved offers of credit altogether and a few have stopped all direct marketing completely during the past 12 months. Many lenders have been sued directly and a few have settled their cases out of court.

However, more companies are feeling that the courts are starting to come down on the side of the marketers. According to Rich Scolio, President, MarketerNet “it appears that the tide in starting to turn in favor of pre-approved offers and it is safe for these lenders to get back in the mail using prescreen data once again. We have seen several lenders that have been side-lined get back into mailing in the past two months.”

The Latest Developments
In the last few months, there have been a number of court decisions involving prescreen practices, including several that are particularly favorable to all of us in the prescreening industry.

In November of 2004, the federal Court of Appeals in Illinois held, in a case called Cole v. U.S. Capital, that a prescreen offer has to have sufficient value to the consumer to justify the prescreening. Under the Fair Credit Reporting Act, a consumer reporting agency may furnish prescreened names to a creditor so long as the creditor agrees to make a firm offer of credit to every name on the list. FCRA defines a firm offer as one that will be honored o long as the consumer continues to meet the criteria by which he or she was selected, the credit information in the application can be verified, and any collateral required is available. The Court in this decision added the additional requirement that the offer must also have sufficient value to consumers so that the “invasion of privacy” entailed by prescreening is justified — the offer has to be a legitimate credit product and not be a guise for a mere solicitation.

Murray vs. Finance America
In a case decided on April 4, 2006, Murray v. Finance America, the plaintiff, Mr. Murray claimed that a solicitation that invited him to call to find out how much credit he qualified for in connection with a mortgage loan was not a firm offer for the following reasons:

1. there was no indication of a minimum amount of credit
2. neither an exact rate of interest rate or even a range of interest rate was mentioned
3. length of time to repay the loan, cost and fees, or other terms were not disclosed

The court agreed that without those terms, the offer was merely a solicitation, not a firm offer. One should be able to look at the “four corners of the offer” to determine whether it met the FCRA definition and an offer that does not state any of the conditions does not meet the test.

The Court distinguished Perry from Cole, in a decision handed down on August 25, 2006. The Court held that in considering the entire offer, it was clear that Perry was pre-approved for a minimum amount of credit; the interest rate was set at 18.9%; and the card can be used anywhere Visa is accepted, not just at one particular location. Although it may not be an attractive offer for most consumers, the Court held that it did have value. After the fees were paid in the first month, the $250 per month was available. If paid off every month, the credit could amount to $3,000 per year. Also, the consumer could build up a good credit rating if payments are made as agreed. All of this meant that the offer had value. However, only two of the three judges agreed. One filed a strong dissent, showing that this is still a close question. An Indiana federal court, in Bonner v. Coretrust decided on July 12, 2006, came to the same conclusion as the majority in the Perry case based on a similar offer.

From this case, one can conclude that if a minimum amount is stated and is not tied to a purchase that makes the minimum amount insignificant, courts may conclude that a small amount of credit has value. The amount of credit offered may not be the determining factor.

Murray vs. HSBC Auto Finance
Pre-approved mailers received very favorable news in another Murray case, this time against HSBC Auto Finance. The Seventh federal district court sided with HSBC. The mail piece contained the following statements: you have been pre-selected; take control of your payments; skip your next car payment. The terms and conditions indicated by an asterisk stated that the next payment would be due between 30 and 75 days after the loan was approved; that Murray might be able to reduce her current interest rate by 5.4%; that the minimum amount of the loan was $5,000; that the loan might not be approved if the selection criteria were not met; and the offer contained an example of the savings that Murray might enjoy.

The court looked to the four corners of the offer and concluded this was a firm offer, since this court read the Cole decision as requiring an inquiry into whether the offer had value to the consumer by looking at the entire context, not just the presence of specific terms. There was a minimum of $5,000. The first payment being due 30 to 75 days after the loan was approved meant that a payment was skipped. The fact that there was no precise interest rate stated, and in fact the offer said the rate may vary, was not fatal to it being a firm offer since that is only one of the terms to consider in deciding whether it had value. Also, the court said that “auto credit obviously depends on the purchase of a car, and certain terms such as the precise amount of credit, depend upon the specific car purchased.” The terms stated were sufficient and have value, according to this court.

Summary
So where does that leave us? One thing is clear: the state of the law is still somewhat in flux and courts are trying to apply rules in a logical manner, but coming up with different results depending on the circumstances.

Although there is no way to be completely safe from litigation, prescreened offers should follow the letter of the FCRA requirements and follow the court decisions as closely as possible. The following recommendations are advised:

1) The offers should be withdrawn only if:

i. the consumer no longer meets the criteria used to select him or her;
ii. the information in the application bearing on specific criteria bearing on credit worthiness cannot be verified; or
iii. the consumer cannot furnish the collateral that was pre-established as a requirement and stated in the offer.

2) The FCRA prescribed notices should be included in the offers in the way prescribed by the FTC and follow the language recommended by the FTC.

3) The offer should have real economic value to consumers and not be a mere advertisement or solicitation to come in and shop. As many of the terms as possible should be included in the mail piece and to the extent possible, they should not be subject to change.

4) However, as to auto or mortgage loans where the actual terms will depend on the value of the car or the property, there may be added flexibility regarding the terms stated in the offer. But the focus should continue to be value to the consumer.

By understanding the current legal landscape, marketers can begin to see how the courts use the FCRA guidelines to decide various legal cases. This will help to ensure that marketing campaigns are complying with the FCRA guidelines and consumer privacy laws.

About MarketerNet, LLC
Chicago-based MarketerNet, LLC is a provider of end-to-end marketing solutions to the mortgage, credit union and automotive industries. MarketerNet provides its clients more than 1,100 credit, demographic and homeowner data points and assists in campaign execution and analysis. MarketerNet provides its solutions to many of the nation’s top prime and subprime lenders through its Intelidata platform, allowing users secure, online access. For more information about MarketerNet, please call 888-443-3684 or visit the Contact Us page.