Litigation Risk Update – Indirect Lending and FCRA
Like all businesses, credit unions face potential litigation risks. For our industry, sometimes the lawsuits that impact banks can have an impact on credit unions later. To start the week off, I wanted to touch on two separate items to keep an eye on – plaintiffs’ attorneys targeting credit union indirect auto lending programs and litigation asserting claims under the Fair Credit Reporting Act (FCRA).
Sometimes in an indirect auto lending relationship, auto dealers can increase the interest rate on car loans a bit higher than what the borrower otherwise qualifies for and keep some or perhaps all of the difference. This is part of how dealers may be compensated, but since that could create an incentive to maximize compensation, these kinds of programs frequently have controls in place from a due-diligence perspective. NCUA issued guidance in August 2010 for all federally insured credit unions and these long-standing risk management practices and NCUA examiners in past years have carefully scrutinized credit unions’ indirect lending relationships.
Through a post on the website ClassAction.org, plaintiffs’ attorneys were specifically seeking consumers who purchased cars at auto dealers with financing provided by credit unions. The post claims that borrowers may have received loans with credit unions as “preferred lenders” but paid higher interest rates that “allows the dealership to take a cut of the interest” without that additional interest mark up being disclosed to the consumer.
While there is not a specific federal regulatory requirement to disclose this kind of information, there may be state laws that contain this kind of requirement, especially state level unfair and deceptive acts or practices provisions or unfair trade practices laws. A summary of these kinds of laws can be found here. NAFCU is aware of at least one of these kinds of lawsuits, so this issue is still developing. Credit unions may want to review their programs for compensating indirect auto lending partners and consult with counsel on possible state law requirements.
According to one study, FCRA lawsuits doubled between 2009 and 2019. There have been a few class actions against credit unions making claims of potential FCRA violations. There are also class action lawsuits that are hitting a variety of industries regarding the employment-related provisions in the FCRA. Overall, this litigation may come in several different forms given the varied nature of the FCRA’s requirements:
- Assertions that a consumer report was impermissibly accessed;
- Claims that information provided to consumer reporting agencies (CRAs) was not accurate;
- Claims that when a consumer report was used to deny employment, adverse action notification requirements were not properly followed.
Suits involving the financial services industry are largely in the first two categories. The FCRA only allows a credit union to access a consumer report if there is a “permissible purpose.” While there are many permissible purposes listed in the statute, common ones for credit unions include transactions initiated by the consumer, and reviewing or collecting on a consumer’s account. One thing to check is whether members are removed from these kinds of review lists after their loans are paid off, charged off, or otherwise closed.
The FCRA also requires that, if a credit union provides information to CRAs, that information must be accurate. In some lawsuits, plaintiffs’ attorneys claimed the date of first delinquency was not properly reported to CRAs, causing negative information to remain on a consumer’s report longer than permitted.
To date, this litigation risk is not widespread within the credit union industry but could be part of why FCRA compliance is on NCUA’s supervisory priorities this year. Credit unions may want to review policies and procedures in this area. Here are a few NAFCU resources related to FCRA compliance:
- NAFCU Compliance Monitor article, A Furnisher's Guide to the FCRA
- NAFCU Compliance Blog posts on the FCRA, including:
Here are some other resources to assist with understanding the FCRA:
- The FCRA, found at 15 USC 1681, and Regulation V’s requirements for furnishers
- FTC 40 Years of Experience with the Fair Credit Reporting Act
- Consumer Compliance Outlook article, Furnishers' Compliance Obligations for Consumer Credit Information Under the FCRA and ECOA
- NCUA Consumer Credit Resources webpage