UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of
Consumer Protection
Division of Financial Practices
|
|
October 27, 1998
Mr. Dean G. Greenblatt
Dear Mr. Greenblatt:
This is in response to your letter requesting the staff's opinion
concerning the application of certain provisions of the Fair Credit
Reporting Act ("FCRA") to the following scenario:
Brokerage clients suffer substantial losses on a financial
product sold to them by their brokerage firm. A large number
of investors obtain legal counsel and notify their brokerage
firm of their losses. An early dispute resolution conference
is scheduled with each brokerage client. Prior to the meetings,
and with civil litigation seeming imminent, the legal department
at the brokerage firm obtains the consumer credit report of
every complainant. Some complainants do not have any debt, negative
balance or outstanding margin balance in their accounts. The
primary purpose for obtaining the credit report is to identify
the financial status of each complainant prior to settlement
negotiations. Settlement offers are prepared, at least to some
extent, based upon the content of the consumer credit reports.
Specifically, you have asked three questions that we will address
here. Those questions are quoted verbatim in italics below, followed
by the staff's analysis.
1. Whether the requests for the consumer credit reports
comply with the requirements of the Fair Credit Reporting Act,
§604, 15 U.S.C. §1681b?
No. Neither the dispute resolution conference, the imminent threat
of civil litigation, nor the desire to craft a settlement offer
provide the brokerage firm with a permissible purpose to obtain
a brokerage client's consumer report under Section 604.
In the 1990 Commentary on the FCRA, the Federal Trade Commission
("Commission") stated that "[t]he possibility that
a party may be involved in litigation involving a consumer does
not provide a permissible purpose for that party to receive a
consumer report on such consumer . . . because litigation is not
a 'business transaction' involving the consumer." 16 C.F.R.
§ 600 App., 55 Fed. Reg. 18804, 18816 (May 4, 1990). This statement
extends to all aspects of litigation, including the pre-litigation
discussions and settlement preparations that you describe, and
was not altered by the recent amendments to the statute.
While the brokerage firm does not have a permissible purpose
to obtain consumer credit reports in the scenario you describe,
the brokerage firm is permitted to obtain such reports for the
purposes enumerated in Section 604(a)(3)(F) of the statute. Section
604(a)(3)(F) allows a consumer reporting agency to provide a consumer
report to anyone who "has a legitimate business need for
the information -- (i) in connection with a business transaction
that is initiated by the consumer; or (ii) to review an account
to determine whether the consumer continues to meet the terms
of the account." Therefore, the brokerage firm may request
a consumer credit report prior to establishing a relationship
with an individual who applies to open an account, or thereafter
to determine whether to discontinue doing business with an established
client.
If the brokerage firm misrepresents to a consumer reporting agency
that it is requesting consumer reports pursuant to Section 604(a)(3)(F),
however, and instead uses the reports in connection with the settlement
discussions you describe, the firm is in violation of the FCRA.
2. Whether the brokerage
firm is required to inform any of the brokerage clients of the
use of the credit reports or that any settlement offers may have
been based upon information in the reports, as in §615, 15 U.S.C.
§1681m?
Because we have opined that the brokerage firm is not permitted
to obtain consumer credit reports in the scenario you describe,
we do not reach this question.
3. If the consumer credit report requests fail to
comply with §604 of the Act, what are the penalties for violation?
The penalties for violating the FCRA are governed by several
different sections of the statute, and the applicability of a
particular section depends on such factors as who brings the action
and the degree of the violator's noncompliance. For example, Sections
616 and 617 impose liability for willful noncompliance and negligent
noncompliance, respectively. The monetary penalties mandated by
these two sections include actual damages proven by a consumer,
plus costs and attorneys fees in each such case. In the case of
willful violations, the court may also award punitive damages
to a consumer. Any person who procures a consumer report under
false pretenses, or knowingly without a permissible purpose, is
liable for $1000 or actual damages (whichever is greater) to both
the consumer and to the consumer reporting agency from which the
report is procured. Also, Section 621 governs enforcement actions
brought by the Commission, other agencies, and the states, and
provides for various monetary and injunctive penalties. The potential
monetary penalties include, for those who knowingly violate the
FCRA, up to $2500 per violation in a civil action brought by the
Commission in district court.
I hope this information is helpful to you. The views expressed
herein are those of the staff and do not necessarily reflect the
views of the Commission or of any individual Commissioner.
Sincerely,
Kellie A. Cosgrove
Attorney
|