“Prescreening” is a term of art under the federal Fair Credit Reporting Act. Generally, creditors cannot ask credit reporting agencies to review their files and identify likely customers for them – or to “prescreen”.
The FCRA provides an exception to this general rule, however. If the creditor is willing to make an actual offer of credit to those identified by the credit reporting agency as likely customers, prescreening is permitted. This actual credit offer is called a “firm offer of credit.” The FCRA doesn’t require that the offer of credit be in any particular amount, however, and it has become a fairly common practice for creditors to make a “firm offer of credit” in a modest amount. This has led some critics of the practice to claim that a “firm offer of credit” in a nominal amount is nothing but a pretext to permit prescreening.

Now a federal appellate court has rendered an opinion that gives support to the critics. The decision, by the Seventh Circuit Court of Appeals (the only federal court any higher than a Circuit Court of Appeals is the Supreme Court), should serve as a warning to any dealer contemplating hiring a marketing company to do a prescreening program based on a “firm offer of credit.” Oneta Cole received a prescreened credit solicitation from U.S. Capital, Inc. and Gleason Chevrolet. It stated that she was pre-approved to receive a Visa or MasterCard with limits up to $2,000 and up to $19,500 in automotive credit.

The solicitation stated she was guaranteed to receive a credit line of at least $300 for the purchase of a vehicle. It also noted that the offer could be revoked if she no longer satisfied the initial criteria.

Cole sued U.S. Capital, AutoNation USA Corp., and the dealership for violating the Fair Credit Reporting Act. The U.S. District Court for the Northern District of Illinois dismissed her initial complaint for failing to state a claim on which relief could be granted.

Cole filed an amended complaint, claiming that the offer did not qualify as a “firm offer of credit” under the FCRA because: (1) it was a sham to justify obtaining her credit information; (2) it contained an offer too vague to be accepted; (3) the language of the flyer was ambiguous or inconsistent; (4) the reservation of the right to require the consumer to pay off existing car loans constituted an option to withdraw the $300 offer; and (5) the letter did not contain a clear and conspicuous disclosure of her opt-out rights under the FCRA (Section 1681m(d)).

The creditors moved to dismiss the complaint, and the court again granted their motion, reasoning that the guaranteed $300 credit amount constituted a firm offer of credit. The district court rejected Cole’s argument that the offer was too vague to constitute a firm offer under Illinois law because Cole could not rely on Illinois law to determine whether the flyer constituted a firm offer under the FCRA.

Unhappy with the district court’s decision, Cole appealed.

The U.S. Court of Appeals for the Seventh Circuit reversed the district court, stating that the lower court’s reading of the “firm offer of credit” test “eviscerated the explicit statutory purpose of protecting consumer data and privacy.” The Seventh Circuit held that a “firm offer” under the FCRA’s prescreening rules “must have sufficient value for the consumer to justify the absence of the statutory protection of his privacy.”

The appellate court viewed an offer of credit without value to the consumer as the equivalent of an advertisement. According to the appellate court, the lower court’s determination that a firm offer is “merely any offer that will be honored” elevates form over substance. The appellate court emphasized that terms in addition to the amount of credit offered will determine whether the offer is a “legitimate credit product” or only a “guise for solicitation.” Other relevant terms would include the interest rate and method of computing the interest rate, the length of the repayment period, the purpose of the credit offer, and other conditions that attach to the offer. If the terms of the offer are “so onerous as to deprive the offer of any value,” it will not constitute a firm offer under the FCRA.

The appellate court noted that the flyer did not specify many of these essential terms. “These missing terms render it impossible for a court to determine from the pleadings whether the offer has value.” Because the allegations in Cole’s complaint would allow her to establish that the offer had no real value, the Seventh Circuit determined that the district court erred in granting the dismissal.

The Seventh Circuit also reversed the district court’s decision on whether the FCRA prescreen opt-out notice was clear and conspicuous. Relying on commercial law and Truth in Lending Act precedents, the appellate court considered the location of the notice in the document, the type size used for the notice and the rest of the document, the font, spacing, color, and other ways in which the notice could be set off from other text to call attention to it. Noting that the text of the notice was the smallest on the page, condensed at the bottom of the flyer, and not distinctive in any way, the appellate court determined that “under any test of conspicuousness, the notice must fail.”

The Seventh Circuit’s opinion imposes a test on dealers and marketers that can’t be found in the FCRA. By requiring that the “firm offer of credit” consist of unspecified and subjective terms and conditions, the court has substituted a very blurry standard for what until now has been a bright line. Under the court’s rationale, each offer of credit will have to be scrutinized by the creditor and marketing company, and ultimately by a court, to see if it passes muster.

So, what should a dealer or marketing company do in light of this opinion? The first thing to note is that the opinion is binding on the lower federal trial courts only in the Seventh Circuit (Wisconsin, Illinois and Indiana). That’s a small comfort, though, because any federal Court of Appeals opinion is a big deal. Even courts that are not bound by the opinion will pay attention to it. So regardless of where you are operating, you will need to take this opinion into consideration. And how do you do that, you ask?

Unfortunately, that answer is harder to come by. The court’s opinion indicates that at least the court believes that you should be looking at the interest rate, the method of computing the interest rate, the length of the repayment period, the purpose of the credit offer, and other conditions that attach to the offer. If these terms are “so onerous as to deprive the offer of any value,” it will not constitute a firm offer under the FCRA. The court’s test lacks any foundation in the FCRA, and until it is fleshed out by other courts appears to be nothing short of a “smell test.”

So sharpen up your olfactory senses (and those of your lawyer) and start sniffing. For now, if it doesn’t smell like a firm offer of credit, it probably isn’t – at least in the Seventh Circuit.

Cole v. U.S. Capital, Inc. 2004 WL 2633296 (7th Cir. (N.D. Ill.) November 19, 2004)