purpose for obtaining Mr. Whitfield’s consumer report, it most certainly had an
insurance-related permissible purpose pursuant to § 1681b(a)(3)(C) -- it used that
information from that report in connection with the underwriting of insurance that
involved the Whitfields. Since it had an insurance-related permissible purpose for
obtaining Mr. Whitfield’s consumer report, its use of that report should, as the district
court correctly recognized, be evaluated pursuant to the insurance subpart of the
definition of adverse action.

B. The district court correctly held that setting a higher initial rate for
insurance constitutes “adverse action”

As the district court correctly recognized, an insurance company takes “adverse
action,” as that term is defined in the FCRA, when, based on information in a
consumer report, that insurance company charges a higher initial price for the
insurance than it would have charged if the information in the report had been more
favorable. D.61 at 7.

Inthe context of an insurance transaction, such as the one in which Radian was
involved, the FCRA defines “adverse action” as:

a denial or cancellation of, an increase in any charge for, or a reduction

or other adverse or unfavorable change in the terms of coverage or

amount of, any insurance, existing or applied for, in connection with the

underwriting of insurance * * *.

§ 1681a(k)(1)(B)G). In Reynolds v. Hartford Financial Services Group, Inc., 435

-15-


opportunity to correct their credit report, fulfilling the purpose of the
FCRA. Notice from Radian after settlement would be meaningless.

Id. at 11-12 (emphasis in original).
SUMMARY OF ARGUMENT

The district court erred when it held that Radian had no obligation to provide
the Whitfields with an adverse action notice. Nonetheless, along the way the district
court resolved several other issues correctly. It correctly recognized that Radian’s
transaction involved the underwriting of insurance. This is so because Radian was
providing insurance. Indeed, Radian did not become involved in the transaction until
three days after the credit portion of the transaction had been consummated.
Moreover, Radian’s justification for obtaining information from Mr. Whitfield’s
consumer report was to evaluate an insurance transaction. Thus, its obligation to
provide an adverse action notice must be analyzed pursuant to the insurance subpart
of the FCRA’s definition of adverse action. Part A, infra.

The court also correctly held that, pursuant to the insurance subpart of the
definition of adverse action, an insurance company takes adverse action when it sets
a higher initial price for insurance based on information in a consumer report. This
is consistent with the wording of the definition and with the FCRA’s goals. Part B,

infra.


whether Radian took any adverse action “with respect to” Mr. Whitfield. The
prepositional phrase “with respect to” means “relates to or pertains to.” Phoenix
Leasing Inc. v. Sure Broadcasting, Inc., 843 F. Supp. 1379, 1388 (D. Nev. 1994),
aff'd without opinion, 89 F.3d 846 (9th Cir. 1996). Radian’s adverse action, charging
ahigher price for the mortgage insurance, relates or pertains directly to Mr. Whitfield
because, as a result of that action, the Whitfields were required to pay more for
mortgage insurance. In fact, it is hard to imagine how the adverse action that Radian
took could be more directly “with respect to” Mr. Whitfield.”

However, instead of focusing on the FCRA’s requirements, the district court
focused instead on “the relationship between the consumer and the mortgage
insurance issuer.” D.61 at 7. Instead of looking to see whether Radian’s adverse
action, the price increase, was “with respect to” Mr. Whitfield, the court looked to see

“whose risk was insured.” To the district court, what was significant was that

2 In addition, a Commission Staff Opinion letter, available on the

Commission’s website, explains that the FCRA’s adverse action notice requirement
applies to mortgage insurance companies that take adverse action with respect to
consumers. Letter from Clarke W. Brinckerhoff to Paul H. Scheiber, March 3, 1998
(http://www. ftc.gov/os/statutes/fera/schieber.htm): see also Letter from Clarke W.
Brinckerhoff to William F. Hall, October 26, 1998 (http://www.ftc.gov/os/statutes/
fera/hall.htm) (adverse action notice requirement applies to company selling credit
insurance); Notice to Users of Consumer Reports: Obligations of Users Under the
FCRA, supra (this notice, which, pursuant to § 1681e(d), must be provided to all
users of consumer reports, specifically advises that “adverse action” “is defined very
broadly” by the FCRA).

-19-


16 CLF.R. Part 698 2.0.2 ccc eee ete ete 1,3, 19

S. Rep. No. 91-517 (1969)... cece een cence eee tee tees 4

-iv-


F.3d 1081 (9th Cir. 2006), the Ninth Circuit held that the definition of “adverse
action” encompasses an increase in the initial rate for insurance because nothing in
the definition implies that the term “increase in any charge for” should be limited to
increases in the cost of previously existing insurance. /d. at 1091. The Ninth Circuit
then noted two important goals of the FCRA: 1) encouraging consumers to check the
accuracy of, and correct any errors in, their consumer reports; and 2) providing
consumers with important information about the benefits of improving their credit
ratings. Id. at 1092. The court held that, ifan increase in the initial rate for insurance
were not considered adverse action, it would:

seriously undermine Congress’s clear purpose. The use of credit reports

to help determine the rates to be charged for initial insurance policies is

common. Moreover it is these policies that the economically

unsophisticated are most likely to purchase. Congress did not create

such strong protections for consumers only to render them inapplicable

in so critical a circumstance. Furthermore, as FCRA is a consumer

protection statute, we must construe it so as to further its objectives.
Id. Accordingly, the district court correctly held in this case that “a higher initial rate
[for insurance based on information in a consumer report] would be an adverse

action.” D.61 at 7.

C. The district court incorrectly held the FCRA’s adverse action notice
requirement did not apply to Radian

Although the district court apparently recognized that Radian took “adverse

-16-


requirement with respect to the time when the user must provide the consumer with
the notice in the context of underwriting insurance, and users routinely provide the
notice after the transaction has been consummated. What the district court failed to
appreciate was that the notice is intended to advise the consumer that adverse action
has been taken based on information in the consumer’s report. It is then up to the
consumer to decide what to do next. If the consumer is aware that information in his
or her report justifies the user’s decision to take adverse action, the consumer may
choose to do nothing. However, if the consumer believes that the report contains only
favorable information that would not justify the adverse action, the consumer may
choose to obtain a copy to check its accuracy. Within 60 days of receiving the
adverse action notice, the consumer may obtain that copy free of charge. § 1681)(b).
The consumer may then take action to correct any inaccuracies, § 168 1i(a), and, once
those inaccuracies are corrected, the consumer may choose to have recent recipients
of the report notified of the correction, § 1681j(d). There is, however, no requirement
under the FCRA that such recent recipients reevaluate any action they took based on
the incorrect report.

Thus, the adverse action notice is an important component of the FCRA’s
statutory scheme for assuring the accuracy of consumer reports. Although the district

court believed that any adverse action notice that Radian would have provided the

-22-


the consumer, the notice provides information on how to obtain a copy ofa report and
the existence of the right to dispute the report’s contents, and allows the consumer,
for a 60-day period following the notice, to receive a free copy of the consumer
report.'’ However, if the consumer does not receive an adverse action notice, there
often is no reason for the consumer to know that information in the report led to an
adverse action, nothing to alert the consumer to check the report, no information as
to how to check a report, and, in many situations, nothing to let the consumer know
that adverse action was taken.

The district court ignored the plain language of § 1681m(a), and, as a result,
failed to recognize that the Act expressly required Radian to provide the Whitfields
with an adverse action notice. The FCRA requires that, if any user of a consumer
report “takes any adverse action with respect to any consumer” based on information
in a consumer report, that user must provide the consumer with an adverse action

notice. § 1681m(a) (emphasis added). Thus, the crucial question in this case is

1" 4 recent amendment to the FCRA provides that a consumer may receive one
free copy of his or her consumer report each year from each of the nationwide
consumer reporting agencies. See § 1681j(a). However, when Radian took adverse
action with respect to the Whitfields, no such right existed, and, absent an adverse
action notice, the Whitfields would have had to pay to obtain a copy of Mr.
Whitfield’s report. Moreover, even under the amended version of the Act, unless the
consumer receives an adverse action notice, the consumer will have to pay ifhe wants
to view his report within a year of having received a free copy.

-18-


been offered if the information in the consumer’s report had been more favorable.
See 12 C.F.R. § 202.2(c)(1)(i). As explained in Part B, infra, under the insurance
subpart, setting a higher initial rate for insurance based on information in a consumer
report constitutes “adverse action,” regardless of whether, as in this case, the
consumer accepts the higher rate.

The court below correctly concluded, citing Broessel, that the transaction at
issue in this case is one of insurance. See D.61 at 5. This conclusion is amply
supported by the undisputed facts of this case. Although the mortgage insurance
Radian underwrites is provided in connection with a credit transaction (Ze., the
Whitfields’ mortgage), Radian is selling insurance, not credit.* Indeed, Countrywide
did not even contact Radian until three days after it had settled on the Whitfields’
mortgage, and it was not until that time that Radian obtained access to information
from Mr. Whitfield’s consumer report. That means that the credit transaction had
been completed before Radian became involved. Moreover, the reason Radian

became involved in the transaction was to spread risk, not to provide a loan. D.61 at

8 Accordingly, the conclusion of the court below that the credit subpart of the
“adverse action” definition was inapplicable (D.61 at 7) is also correct. However,
that conclusion is not necessary in order to conclude that Radian’s actions fell within
the overall statutory definition. Even if it were concluded that Radian’s actions also
involved “credit” so as to make the credit prong of the definition relevant, they also
involve insurance, and the analysis under the insurance subpart plainly shows that
Radian’s actions come within the statutory definition of “adverse action.”

-13-


the consumer with the name and address of the consumer reporting agency that was
the source of the report. § 1681m. The person that took the adverse action must also
inform the consumer that the FCRA allows the consumer to dispute the accuracy or
completeness of information in the consumer report. /d. The Act further requires a
consumer reporting agency, upon request, to provide a consumer with a copy of the
report, § 1681g(a), to reinvestigate information in the report that the consumer
disputes, § 1681i(a), and to delete information that is inaccurate or cannot be verified,
§ 1681i(a)(5). Thus, these provisions of the FCRA dovetail to make the credit
reporting system more open and reliable -- the consumer must be told when adverse
action is based on a consumer report, the consumer may obtain a copy of his report,
and then the consumer may determine whether the report contains inaccurate
information. Absent the notice, the consumer may never know to invoke the Act’s
accuracy protections, and, as in a case such as this one, may never even learn that
adverse action has occurred.

2. Factual Background

The facts in this case are not in dispute. Whitney and Celeste Whitfield sought
a home mortgage from Countrywide Home Mortgage. When Countrywide evaluated
the Whitfields’ mortgage application, it obtained information from Mr. Whitfield’s

consumer report. Countrywide agreed to provide the Whitfields with a mortgage, but

5.


Joseph C. Kohn

Christina D. Saler

Kohn, Swift & Graf, PC

One South Broad Street

Suite 2100

Philadelphia, PA 19107

4) Identical compliance of briefs -- I certify that the text of the electronic brief,
which was submitted to this Court, is identical to the paper copies that were served
on this Court and on appellants.

5) Virus check -- I certify that I have run a virus check on this brief and no virus was
detected. I used Symantec AntiVirus Corporate Edition 8.1 (updated to March 8,
2006).

ayy)
Le Le

Lawrence DeMille-Wagman’/



light of the Commission’s key role administering the FCRA, courts have relied on the
Commission’s analysis of the Act’s provisions. See Cole v. U.S. Capital, Inc., 389
F.3d 719, 722 n.2 (7th Cir. 2004); Ollestad v. Kelley, 573 F.2d 1109, 1111 (9th Cir.
1978); see also Houghton v. New Jersey Mfrs. Ins. Co., 795 F.2d 1144, 1152 & n.2
(3d Cir. 1986) (Sloviter, J., concurring).

To further the FCRA’s goals of fairness and accuracy, Congress imposed
distinct obligations on the various entities involved in the compilation and use of
consumer reports: the consumer reporting agencies that assemble and disseminate the
reports (§ 1681b); “furnishers,” who provide the data to be compiled (§ 1681s-2); and
those who use consumer reports to make decisions regarding credit, employment,
insurance, or other matters (§ 1681m). The requirements imposed on “users” -- i.e.,
that they notify consumers of “adverse actions” taken on the basis of information
obtained from a consumer report -- serve a pivotal function in assuring the fairness
and accuracy of the consumer reporting system. Such notices are often the only way
in which consumers learn of inaccurate or incomplete information in their reports --
and thus provide them an opportunity to take steps to correct any such information.

In the present case, a district court has dismissed a private lawsuit based on its
conclusion that a mortgage insurance company does not violate the FCRA when it

fails to inform the consumer that, based on information in a consumer report, the

-2-


INTEREST OF THE FEDERAL TRADE COMMISSION

The Fair Credit Reporting Act (“FCRA” or “the Act”), 15 U.S.C. § 1681-
§ 1681x,! seeks to ensure the “[a]ecuracy and fairness of credit reporting,” § 1681(a),
which Congress recognized as important not only to the interests of individual con-
sumers but also to the efficient functioning of the banking system. Congress has
entrusted the Federal Trade Commission (“FTC” or “Commission”) with primary
responsibility for governmental enforcement of the FCRA. The Commission
regularly brings enforcement actions pursuant to this authority.’ It has issued
interpretive guidance regarding various aspects of the Act’s requirements, 16 C.F.R.
Part 600, as directed by the Act, has promulgated a Summary of Consumer Rights,
Notice of User Responsibilities, and Notice of Furnisher Responsibilities, 16 C.F.R.
Part 698, and has also promulgated a variety of rules necessary to implement various

requirements under the Act, see 16 C.F.R. Parts 602-604, 610-611, 613-614, 682. In

| Sections of the FCRA will hereinafter be referred to by their section number
in Title 15 of the United States Code.

2 See, e.g., United States v. ChoicePoint, Inc., 1:06-cv-00198-JTC (N.D. Ga.,
Feb. 15, 2006) (consumer reporting agency provided consumer reports to users who
did not have a permissible purpose); United States v. Far West Credit, Inc., No. 2:06
CV 00041 TC (D. Utah, Jan. 17, 2006) (consumer reporting agency failed to follow
reasonable procedures to assure accuracy of consumer reports); United States v.
Equifax Credit Information Servs., Inc., No. 1:00-CV-00087 (N.D. Ga. Jan. 26, 2000)
(failure to provide adequate consumer access for inquiries regarding consumer report
errors).

-1-


9. Spreading risk is the quintessential element of the business of insurance. See
Union Labor Live Ins. Co. v. Pireno, 458 U.S. 119, 127 (1982). Thus, regardless of
Radian’s connection to the credit transaction, its involvement was most certainly “in
connection with the underwriting of insurance.” See § 168la(k)(1)(B)().
Accordingly, its actions with respect to the Whitfields must be analyzed under the
insurance subpart of the definition of “adverse action.”

This conclusion is further supported by Radian’s purpose for obtaining the
information from Mr. Whitfield’s consumer report, which was to use it in connection
with an insurance transaction. The FCRA allows persons to obtain consumer reports
only for permissible statutory purposes. § 1681b(f)(1). Among the permissible
purposes set forth in the FCRA, the one that is most pertinent to Radian is the
insurance permissible purpose, which permits a user to obtain a report to use “in
connection with the underwriting of insurance involving the consumer.”

§ 1681b(a)(3)(C).’ Regardless of whether Radian had a credit-related permissible

A person may also obtain a consumer report in connection with a credit
transaction, § 1681b(a)(3)(A); in response to a court order, § 168 1b(a)(1); in response
to a consumer’s written instructions, § 1681b(a)(2); for employment purposes,
§ 1681b(a)(3)(B); to evaluate a consumer for a license or government benefit,
§ 1681b(a)(3)(D); to evaluate, for investment purposes, a lender’s loan portfolio,
§ 1681b(a)(3)(E); for certain other business transactions initiated by the consumer,
§ 1681b(a)(3)(F); or in connection with the administration of enforcement ofa child
support order, § 1681b(a)(4), (5).

-14-


STATEMENT OF THE CASE

1. The Fair Credit Reporting Act

Congress passed the FCRA in 1970 after extensive hearings. Those hearings
showed the importance of credit reporting to the economy but revealed certain
systemic problems. Primary among these was that the consumer reporting industry
was cloaked in a shroud of secrecy:

One problem which the hearings * * * identified is the inability at times

of the consumer to know he is being damaged by an adverse credit

report. Standard agreements between credit reporting agencies and the

users of their reports prohibit the user from disclosing the contents of

the report to the consumer. In some cases, the user is even precluded

from mentioning the name of the credit reporting agency. Unless a

person knows he is being rejected for credit or insurance or employment

because of a credit report, he has no opportunity to be confronted with

the charges against him and tell his side of the story.
S. Rep. No. 91-517 at 3 (1969).

The FCRA addresses this problem by requiring that, when any “person” (which
includes an insurance company, see § 1681a(b)) takes any “adverse action with

respect to any consumer,” based even in part on information in a consumer report’,

that person must notify the consumer that adverse action was taken, and must furnish

3 Consumer reporting agencies are commonly known as “credit bureaus,” and
consumer reports are commonly knownas “credit reports,” although, as demonstrated
by this case, the reports are used not only by creditors, but by insurers, employers,
and others. See § 1681b (setting forth those persons who have a “permissible
purpose” for receiving a consumer report from a consumer reporting agency).

-4-


“{p}rivate mortgage insurance does not protect a borrower against his own inability
to pay; mortgage insurance protects the lender against a default by the borrower.”
D.61 at 9. Even though the impact of Radian’s adverse action fell completely on the
Whitfields, i.c., they had to pay the higher price, the court was concerned solely with
the fact that “the beneficiary of the insurance was Countrywide.” D.61 at 10."
Not only did the district court ignore the plain words of the FCRA, it also
concluded its opinion with a completely inappropriate balancing test that it believed
justified its decision to abrogate the FCRA’s adverse action notice requirement. D.61
at 10-12. The court began the balancing by observing that the F CRA’s adverse action
notice requirement “while not onerous, is not insignificant.” D.61 at 11. The court
next attempted to assess what it believed would be the benefits of the notice. The
court noted that Radian did not take adverse action until after the Whitfields had
already settled on the mortgage. Thus, the court believed that “[aJn adverse action

notice from Radian could have the effect of interfering with a contractual relation

13 Tn addition, as explained in Part A, supra, Radian had a permissible purpose
to obtain information from Mr. Whitfield’s consumer report “in connection with the
underwriting of insurance involving” the Whitfields. See § 1681b(a)(3)(C). That is,
even though the Whitfields were not parties to, or beneficiaries of, Radian’s mortgage
insurance policy, the underwriting of that policy “involv[ed]” them. Since the
underwriting of the policy involved the Whitfields, a fortiori the setting of the
premiums for that policy, which the Whitfields were required to pay, was “with
respect to” them.

-20-


IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 05-5017

WHITNEY WHITFIELD and CELESTE WHITFIELD,
Plaintiffs-Appellants,

ve

RADIAN GUARANTY, INC.,
Defendant-Appellee.

ON APPEAL FROM A FINAL ORDER OF THE UNITED STATES
DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
GRANTING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

BRIEF OF THE FEDERAL TRADE COMMISSION AS AMICUS CURIAE
SUPPORTING APPELLANTS AND URGING REVERSAL

WILLIAM BLUMENTHAL
General Counsel

JOHN F. DALY
Deputy General Counsel for Litigation

LAWRENCE DeMILLE-WAGMAN
Attorney

Federal Trade Commission

600 Pennsylvania Ave., N.W.
Washington, D.C. 20580

(202) 326-2448


adverse action notice, as required by the FCRA. On October 25, 2004, Radian filed
its answer. Although it denied most of the allegations of the complaint, it admitted
that it had not provided the Whitfields an adverse action notice. On July 7, 2005,
Radian moved for summary judgment.

The court (per Judge Sanchez) granted Radian’s motion on October 21, 2005,
and entered judgment in favor of Radian. D.61 © After reviewing the undisputed
facts, the court noted that it disagreed with the decisions of three other district courts,
all of which had held that, in situations similar to the Whitfields’, the insurance
company owes an adverse action notice to the consumer. D.61 at 7. However, the
court indicated that it agreed with the holding of one of those cases, Broessel v. Triad,
supra, to the extent that it held that the central issue in this case (i.e., whether Radian
should have provided the Whitfields with an adverse action notice) must be analyzed
“under the insurance prong of the FCRA [§ 1681a(k)(1)(B)(i)], not the catch-all
[§ 1681a(k)(1)(B\iv)] or credit provisions [§ 168la(k)(1)(A)].” The court also
agreed with Broessel’s holding that “a higher initial rate [for the mortgage insurance]
would be an adverse action,” and that “privity between the parties is not a condition
precedent to triggering” the FCRA’s adverse action notice requirement. /d. at 7-8.

However, the court faulted Broessel and the other district court decisions for

® The court’s decision is reported at 395 F. Supp. 2d 234 (E.D. Pa. 2005).
-7-


only on condition that the Whitfields pay for private mortgage insurance.’ With this
understanding, the Whitfields settled on their mortgage.

Three days after the settlement, Countrywide contacted appellee Radian
Guaranty, Inc., to request that it provide mortgage insurance. Radian agreed to do so
at a price of $903.58 per month. Radian based this price on the loan-to-value ratio
of the Whitfields’ mortgage, and on Mr. Whitfield’s credit score, which was obtained
from his consumer report. Radian conceded that, if Mr. Whitfield’s credit score had
been higher, Radian would have charged a lower price for the mortgage insurance.
Each month, the Whitfields paid the premium for the mortgage insurance to
Countrywide, and Countrywide forwarded that amount to Radian. Countrywide was
the beneficiary of the policy. Neither Radian nor Countrywide provided the
Whitfields with an adverse action notice under the FCRA.

3. Proceedings Below

The Whitfields filed their complaint against Radian on January 12,2004. D.1°
They alleged that Radian had, in connection with setting the rate for the mortgage

insurance, taken adverse action against them, but had failed to provide them with an

‘ Private mortgage insurance covers credit risk. It is obtained to reduce the
lender’s loss if the borrower defaults on the mortgage. See Brantley v. Republic
Mortgage Ins. Co., 424 F.3d 392, 394 n.1 (4th Cir. 2005).

5 Documents in the district court’s docket are referred to as “D.xx.”

-6-


insurance company has set the price that the consumer must pay for mortgage
insurance higher than the price it would have charged if the information in the report
had been more favorable. The district court’s holding conflicts with the
Commission’s Notice of User Responsibilities, 16 C.F.R. Part 698, App. H, and with
the decisions of at least three other district courts, Broessel v. Triad Guar. Ins. Corp.,
No. 1:04 CV-4-M, 2005 U.S. Dist. LEXIS 20361 (W.D. Ky., Sept. 15, 2005); Glatt
v. The PMI Group, Inc., No. 2:03-cv-326-FtM-29SPC, 2004 U.S. Dist. LEXIS 28927
(M.D. Fla., Sept. 7, 2004); Preston v. Mortgage Guar. Ins. Corp. of Milwaukee, No.
5:03-cv-111-Oc-10GRJ (M.D. Fla., Dec. 19, 2003). Because this Court’s ruling will
likely be the first appellate precedent, and because this case could have a significant
impact on consumers, the outcome is of great importance to the Commission.
ISSUE PRESENTED FOR REVIEW

Whether the fact that mortgage insurance is procured by a consumer’s lender,
and the lender is the policy’s sole beneficiary, obviates the mortgage insurance
company’s obligation to provide the consumer with an adverse action notice when,
as a result of information in that consumer’s report, the company charges a higher

price for the mortgage insurance, and that higher price is paid by the consumer.


action” when, based on information in Mr. Whitfield’s consumer report, it charged
a higher initial price for the mortgage insurance, the court then erred by failing to
hold that the FCRA required Radian to provide the Whitfields with an adverse action
notice. The district court’s decision was based on its misunderstanding of the plain
wording of the FCRA, and on its failure to appreciate the goals and purposes of that
Act. If upheld, the district court’s decision would undermine the FCRA’s statutory
scheme.

The FCRA requires that:

If any person takes any adverse action with respect to any consumer that

is based in whole or in part on any information contained in a consumer

report, the person shall (1) provide oral, written, or electronic notice of

the adverse action to the consumer.
§ 1681m(a).'° The purpose of the adverse action notice is to alert the consumer that
adverse action has been taken, at least in part, as a result of information in his or her

consumer report. Having received such an alert, the consumer may choose to check

the contents of the report to make sure that it is both accurate and complete. To assist

10 Section 1681m(a) also requires that the notice of adverse action provide the
consumer with the name, address, and phone number of the consumer reporting
agency that furnished the report, § 1681m(a)(2)(A); a statement that the consumer
reporting agency did not make the decision to take the adverse action,
§ 1681m(a)(2)(B); notice that the consumer is entitled to receive a free copy of his
consumer report, § 1681m(a)(3)(A); and notice that the consumer has the right to
dispute the completeness or accuracy of any information in his report,
§ 1681m(a)(3)(B).

-17-


Whitfields would have been “meaningless,” it was wrong. That notice would have

alerted the Whitfields to Radian’s adverse action, and might have spurred them to

check the accuracy of Mr. Whitfield’s report. A central purpose of the FCRA is to

promote the accuracy of consumer reports, § 1681(b), but the Act does so not through

any direct intervention but by encouraging each consumer to police his or her report.

Radian’s adverse action notice, which would have furthered that all-important goal,

would hardly have been “meaningless.”

CONCLUSION

For the reasons set forth above, this Court should reverse the district court and

hold that the FCRA required Radian to provide the Whitfields with an adverse action

notice.

Respectfully submitted,

WILLIAM BLUMENTHAL
General Counsel

JOHN F. DALY
Deputy General Counsel for Litigation

Koren LMML: erntan—

LAWRENCE DeMILLE-WAGMAN
Attorney

Federal Trade Commission

600 Pennsylvania Ave., N.W.
Washington, D.C. 20580

(202) 326-2448


United States v. Equifax Credit Information Services, Inc.,
No. 1:00-CV-00087 (N.D. Ga. Jan. 26, 2000) «1.0... 0-0 eee eee eee 1

United States v. Far West Credit, Inc.,
No. 2:06 CV 00041 TC (D. Utah, Jan. 17, 2006) .....---- 0 eee eee eee 1

FEDERAL STATUTES

15 U.S.C. § 1691(0)(6) o.oo eee ttt eens 12

The Fair Credit Reporting Act , 15 U.S.C. § 1681 - § 168K... eee eee 1
Ss) 1, 2, 23
5 C9 0 4,7, 12, 14, 15
$1681 cee eee enters 2, 4, 14, 15, 20
oc) ore 19
§ 1O81E oo eee etter es 5
SS) 5,22
A S30 a 18, 22
§ 168IM oe eee eee tenes 2,5, 17, 18
8 1O81S-2 eee t trent 2

MISCELLANEOUS

12 CER. § 202.2(c)(1)G) .. 0. eect teens 13

16 CER. Part 600 0... eee eee eee een n ene 1

16 CER. Parts 602-604, 610-611, 613-614, 682 ....... 6... eee eee eee 1

~lii-


However, after resolving these two initial issues correctly, the court then went
astray. In particular, the court’s holding that Radian had no obligation to provide the
Whitfields with an adverse action notice was based on its misreading of the FCRA,
and its misunderstanding of the central purpose of the adverse action notice. Instead
of assessing whether Radian’s setting of a higher initial price constituted “adverse
action with respect to” the Whitfields, which is what the FCRA requires, the court
focused only on the fact that the Whitfields were not the beneficiaries of the mortgage
insurance. The court also based its conclusion on a balancing test of its own devise --
it was unwilling to impose on Radian what it assessed to be the burden of providing
the Whitfields with an adverse action notice because, in its view, the Whitfields
would not benefit from a notice received after the consummation of the credit
transaction. Not only is there no basis in the FCRA for such a balancing test, but also
the court’s application of that test showed that it misunderstood the purpose of the
adverse action notice. The notice is not, as the court mistakenly believed, intended
to assist the consumer in qualifying for the underlying transaction. Instead, its
purpose is to inform the consumer that a user took adverse action based on the
consumer report, and to advise the consumer how to check the contents of the report
to assure its accuracy or completeness. Absent such a notice, consumers such as the

Whitfields might never know that potentially incorrect or incomplete information in

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actions” that users of consumer reports may take in connection with various types of
transactions: credit transactions, § 168la(k)(1)(A); imsurance transactions,
§ 1681a(k)(1)(B)@); employment transactions, § 168la(k)(1)(B)Gi); transactions
involving licenses or government benefits, § 1681a(k)(1)(B)Gii); and a catch-all
provisions for transactions initiated by a consumer, § 1681a(k)(1)(BXiv). The
insurance subpart specifies that the term “adverse action” includes:
a denial or cancellation of, an increase in any charge for, or a reduction
or other adverse or unfavorable change in the terms of coverage or
amount of, any insurance, existing or applied for, in connection with the
underwriting of insurance * * *.
The credit subpart specifies that “adverse action” includes:
a denial or revocation of credit, a change in the terms of an existing
credit arrangement, or a refusal to grant credit in substantially the
amount or on substantially the terms requested 2
The difference between the two subparts, while subtle, is potentially quite important
in a case like the present one. For example, under the credit subpart, an increase in
the charge for a new loan would not constitute “adverse action” if the consumer

applied for the loan and, based on information in a consumer report, the consumer

were offered, and accepted, less favorable initial terms than the consumer would have

7 The credit subpart of the FCRA’s definition of “adverse action,”
§ 1681a(k)(1)(A), states that “adverse action” “has the same meaning as in section
701(d)(6) of the Equal Credit Opportunity Act [15 US.C. § 1691(d)(6)].” The FCRA

definition set forth above quotes 15 U.S.C. § 1691(d)(6).
-12-


TABLE OF AUTHORITIES
FEDERAL CASES Page

Brantley v. Republic Mortgage Insurance Co.,
424 F.3d 392 (4th Cir. 2005) 0.066 6

Broessel v. Triad Guaranty Insurance Corp.,
No. 1:04 CV-4-M, 2005 U.S. Dist. LEXIS 20361

(W.D. Ky., Sept. 15, 2005) 2.6.2. eee eee eee eee tees 3,7
Cole y. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004) .......-.-050-- 2
Glatt v. The PMI Group, Inc., No. 2:03-cv-326-FtM-29SPC,

2004 U.S. Dist. LEXIS 28927 (M.D. Fla., Sept. 7, 2004) ...........-. 3
Houghton v. New Jersey Manufacturers Insurance Co.,

795 F.2d 1144 (3d Cir. 1986) 2.00... ee eee eee eee eee 2
Ollestad v. Kelley, 573 F.2d 1109 (9th Cir. 1978) .........2 22s e eee 2

Phoenix Leasing Inc. v. Sure Broadcasting, Inc.,
843 F. Supp. 1379 (D. Nev. 1994),

aff'd without opinion, 89 F.3d 846 (9th Cir. 1996) -...-...-.+-0 ++ 19
Preston v. Mortgage Guaranty Insurance Corp. of Milwaukee,

No. 5:03-cv-111-Oc-10GRJ (M.D. Fla., Dec. 19, 2003) .....-....--55 3
Reynolds v. Hartford Financial Services Group, Inc.,

435 F.3d 1081 (9th Cir. 2006) .... 0... cece eee eee eee ees 15, 16
Union Labor Live Insurance Co. v. Pireno, 458 U.S. 119 (1982) ....... 14

United States v. ChoicePoint, Inc.,
1:06-cv-00198-JTC (N.D. Ga., Feb. 15, 2006) .... 6-66. eee ee eee ee 1

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between Countrywide and Whitfield.” Jd. The court also believed that the purpose
of the notice would only be served if it were received by the Whitfields in time for
them to correct any inaccuracies prior to consummation of the transaction in which
adverse action was taken. Thus, the court concluded that “[nJotice from Radian after
settlement would be meaningless,” D.61 at 12, and that the “not insignificant” burden
imposed on Radian would outweigh any benefit to the Whitfields.

The court erred because the FCRA contains no balancing test. If a user takes
adverse action with respect to a consumer, that user’s obligation to provide the notice
is absolute. Itis not for the user, or for the district court, to determine whether, in its
view, the notice would be of value to the consumer. Congress already made that
determination.

Moreover, when it weighed the benefits of any adverse action notice to the
Whitfields, the court demonstrated a grave misunderstanding of the purpose of the
adverse action notice. The notice is not, as the court mistakenly believed, intended
to provide the consumer with a means of avoiding the adverse action that triggered
the notice. Although the court believed that the notice would benefit the Whitfields
only if they received it prior to consummation of their mortgage, the court failed to
recognize that the FCRA does not require an insurance company such as Radian to

provide the notice prior to taking adverse action. Indeed, the FCRA contains no

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TABLE OF CONTENTS

TABLE OF AUTHORITIES .........-.. 000 cece eee eee neces
INTEREST OF THE FEDERAL TRADE COMMISSION .......-.-+
ISSUE PRESENTED FOR REVIEW ...... 0.00 s eee e cece cents
STATEMENT OF THE CASE .... 0.0.0.2 ee eee eee eee ee eee
1. The Fair Credit Reporting Act ..........05.00 22s eee
2. Factual Background ....... 5.002 e eee cere eee eee ee
3. Proceedings Below ....... 0.60. cece eee eee eee eens
SUMMARY OF ARGUMENT ... 2.06.00 eee ee eee eect ee

ARGUMENT .....0 00.0000 eee centre nnn tener eens

THE DISTRICT COURT ERRED IN HOLDING THAT RADIAN
WAS NOT REQUIRED TO PROVIDE THE WHITFIELDS

WITH AN ADVERSE ACTION NOTICE .......-- 000-00 seer eee

A. _ The district court correctly determined that the transaction

at issue involved the underwriting of insurance ..........

B. The district court correctly held that setting a higher

initial rate for insurance constitutes “adverse action” .....

C. The district court incorrectly held the FCRA’s adverse

action notice requirement did not apply to Radian .......

CONCLUSION 2.02.00 0 002 o cee eens

COMBINED CERTIFICATIONS

Page

ii


COMBINED CERTIFICATIONS
1) Bar membership -- Because this brief is filed on behalf of an administrative
agency of the United States, there is no bar membership requirement.
2) Word count -- I certify that this brief complies with Fed. R. App. P.
32(a)(7)(B). It is proportionally spaced and contains 5792 words, as counted by the
WordPerfect word processing program.
3) Service upon counsel -- I hereby certify that on March 14, 2006, I served ten
copies of the Brief of the Federal Trade Commission as Amicus Curiae Supporting
Appellants and Urging Reversal on this Court by express overnight delivery. On the
same day, I served two copies of the same brief on appellants and appellees by
sending those copies by express overnight delivery to:
David Smith
Theresa Loscalzo
Schnader Harrison Segal & Lewis, LLP
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Kathleen Clark-Knight
Terry A. Smiljanich
James Hoyer Newcomer & Smiljanich, PA
4830 W. Kennedy Blvd.

Suite 550
Tampa, FL 33609


missing what it considered to be the crucial issue: “whose risk was insured.” D.61
at 9. The court then focused on the fact that:

[t]he insurance transaction was one between Radian and Countrywide.

The insurance transaction had the effect of determining what a mortgage

would cost the Whitfields only to the extent Countrywide is risk averse.

The premium paid allowed the Whitfields to obtain a mortgage, but the

beneficiary of the insurance was Countrywide.
Id. at 10. The court then observed that the FCRA’s adverse action notice requirement
“while not onerous, is not insignificant.” Jd. at 11. Moreover, the court was
concerned that, if Radian were obliged to provide the Whitfields with a notice, such
an obligation “would require Radian to enter into correspondence with consumers
with whom the company had no direct contact.” The court was also apparently
concerned that, if Radian were to provide the Whitfields with an adverse action
notice, this would somehow permit the Whitfields to avoid their mortgage: “[a]n
adverse action notice from Radian could have the effect of interfering with a
contractual relation between Countrywide and Whitfield.” Finally, the court believed
that the purpose of the adverse action notice was to provide the consumer with
information in advance of the consumer’s entering into a transaction, and that a notice
from Radian would not serve that purpose:

Radian did not become Countrywide’s mortgage insurer until three days

after the Whitfields settled on their house. * * * [If they had received
notice prior to settlement] the Whitfields would have had a meaningful

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Mr. Whitfield’s consumer report may have led to a higher price for insurance. And,
absent such a notice, that same incorrect or incomplete information could continue
in the future to have an adverse impact on them. Part C, infra.
ARGUMENT

THE DISTRICT COURT ERRED IN HOLDING THAT RADIAN WAS NOT
REQUIRED TO PROVIDE THE WHITFIELDS WITH AN ADVERSE
ACTION NOTICE

At the outset of its decision, the district court correctly held that Radian’s
transaction, the underwriting of mortgage insurance, was an insurance transaction for
purposes of applying the FCRA’s definition of adverse action. The court also held
that the setting of a higher initial rate for insurance constitutes adverse action. But
after resolving these two issues, the court ignored the express language of the FCRA
and held that Radian had no obligation to provide the Whitfields with an adverse
action notice. This Court should reverse this decision, which, if upheld, would

undermine the goals of the FCRA.

A.  Thedistrict court correctly determined that the transaction at issue
involved the underwriting of insurance

The district court correctly held that Radian’s sale of mortgage insurance
constitutes the underwriting of “insurance” under the FCRA. D.61 at 7. The FCRA’s

definition of “adverse action” has five subparts, each of which sets forth “adverse

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