United States: The FACT Act’s Effect on Federal Preemption Under the Fair Credit Reporting Act

This article will briefly explore how courts have traditionally applied preemption under the FCRA to state law claims raised against furnishers of credit information, the new preemption provisions contained in the FACT Act, and how those new provisions are being implemented by the Federal Trade Commission and the Federal Reserve.

Since 1970, the Fair Credit Reporting Act, 15 U.S.C. §1681, et seq., (the "FCRA") has set out national standards governing the reporting and dissemination of consumers’ credit information. The preemptive reach of the FCRA has been extended by Congress through subsequent amendments to the Act, most recently through the enactment in December 2003 of the Fair and Accurate Credit Transactions Act of 2003, Public Law No. 108-159 (the "FACT Act"). Prior to the passage of the FACT Act, a key component of the FCRA’s preemption scheme had been slated to expire at the close of 2003.

This article will briefly explore how courts have traditionally applied preemption under the FCRA to state law claims raised against furnishers of credit information, the new preemption provisions contained in the FACT Act, and how those new provisions are being implemented by the Federal Trade Commission and the Federal Reserve.

As originally enacted, the FCRA focused primarily on regulating the activities of consumer reporting agencies. Prior to the 1996 amendments to the Act, cases interpreting the FCRA had generally held that liability under the Act was limited to consumer reporting agencies and users of consumer reports, and generally did not include furnishers of credit information. See, e.g., Vazquez-Garcia v. Trans Union De Puerto Rico, 222 F.Supp.2d 150, 154 (D. Puerto Rico 2002). The law also expressly barred a number of common law claims arising from consumer credit transactions. With certain limited exceptions, the FCRA specified that "no consumer may bring any action or proceeding in the nature of defamation, invasion of privacy, or negligence with respect to the reporting of information against any consumer reporting agency, any user of information, or any person who furnishes information to a consumer reporting agency" except in cases where the false information was furnished with malice or willful intent to injure the consumer. 15 U.S.C. §1681h(e).

In 1996, Congress passed the Consumer Credit Reporting Reform Act, which made significant changes to the FCRA.¹ Among other things, the law greatly expanded the responsibilities of furnishers of credit information. The most significant change in this regard was the addition of 15 U.S.C. §1681s- 2. §1681s-2 "identifies two duties imposed upon such furnishers of information: the duty to provide accurate information (citing § 1681s- 2(a)) and the duty to undertake an investigation upon receipt of notice of dispute from a consumer reporting agency (citing § 1681s-2(b))." Carney v. Experian Information Solutions, Inc., 57 F.Supp.2d 496, 501 (W.D. Tenn. 1999). See also, Vazquez-Garcia, 222 F.Supp.2d at 154 (stating that § 1681s- 2 imposes duty upon furnishers of credit information to provide accurate information and conduct investigation upon notice of consumer dispute). Congress limited the enforcement of §1681s-2(a) to governmental entities, but did provide consumers with a private cause of action for violation of §1681s-2(b). Nelson v. Chase Manhattan Mortgage Corp., 282 F.3d 1057, 1059 (9th Cir. 2002).

The 1996 amendments to the FCRA also contained a new preemption provision; 15 U.S.C. §1681t, entitled "Relation to State Laws." Until its amendment by the FACT Act, §1681t provided that "[n]o requirement or prohibition may be imposed under the laws of any State" regarding, among other things, the exchange of consumer information between affiliated companies² and the responsibilities of furnishers of credit information to consumer reporting agencies.³ The original preemption provision, §1681h(e), remained a part of the FCRA even after the 1996 amendments. Id.

Courts have come to different conclusions regarding the proper approach to preemption of state law claims against furnishers of credit information under 15 U.S.C. §1681t and the preexisting preemption provision, 15 U.S.C. §1681h(e). See, e.g., Riley v. General Motors Acceptance Corp., 226 F.Supp.2d 1316, 1325 (S.D. Ala. 2002) (discussing the various approaches). A number of courts have ruled that §1681t completely preempts all state law claims against providers of credit information. For example, the court in Hasvold v. First USA Bank found that the preemption offered to furnishers of credit information under §1681t is not limited by way of the original, more general, preemption provision in 15 U.S.C. §1681h:

While Congress did not specifically provide in the 1997 [sic] amendments that section 1681t supercedes 1681h, it is clear from the face of section 1681t(b)(1)(F) that Congress wanted to eliminate all state causes of action "relating to the responsibilities of persons who furnish information to consumer reporting agencies." Any other interpretation would fly in the face of the plain meaning of the statute.

Hasvold v. First USA Bank, 194 F.Supp.2d 1228, 1239 (D. Wyo. 2002) (footnote omitted). See also, Purcell v. Universal Bank, N.A., 2003 WL 1962376 (E.D. Pa. 2003) (taking the same approach).

A number of other courts have attempted to harmonize the scope of the preemption offered under §1681h(e) and §1681t by using a temporal approach. Under this line of cases, only those state law claims against furnishers of credit information based on events arising after the furnisher received notice of the consumer’s dispute through a consumer reporting agency—when potential liability arises under 1681s(2)(b)—are preempted by 15 U.S.C. §1681t. Aklagi v. Nationscredit Financial, 196 F.Supp.2d 1186, 1194 (D. Kan. 2002). The court in Aklagi found that claims arising from events prior to notification of the consumer’s dispute are analyzed under the qualified immunity standard of §1681h(e). Id. See also, Vazquez- Garcia, 222 F.Supp.2d at 161 (adopting the reasoning of Aklagi). But see, Gordon v. Greenpoint Credit, 266 F.Supp.2d 1007, 1013 (S.D.Iowa 2003) (rejecting the temporal approach of Aklagi and applying §1681h(e) to all defamation and negligence claims).

As enacted, §1681t contained a sunset provision which specified that the prohibitions against state laws regulating the exchange of consumer information between affiliated companies and the responsibilities of furnishers of credit information to consumer reporting agencies would not apply to state laws enacted after January 1, 2004 that granted greater consumer protections than those provided in the FCRA. 15 U.S.C. §1681t(d)(2) (2003). Thus, if the FCRA had not been amended prior to the end of 2003 and the expiration of those preemption provisions, furnishers of credit information could have been faced with trying to comply with any number of state laws that were more stringent than the FCRA. Ultimately, the FACT Act not only made the preexisting preemption provisions of §1681t permanent, but it also extended the preemptive reach of the FCRA into a number of new areas.

The FACT Act contains five provisions that relate to state laws. Sections 151(a)(2), 212(e), 214(c), 311(b), and 711 of the FACT Act each amends §1681t of the FCRA to limit liability under state law in areas that are addressed in other substantive portions of the FACT Act. Among other things, these provisions preempt state laws relating to: safeguards against identity theft and the rights of identity theft victims; the disclosure of credit scores to consumers; the sharing of consumer information for marketing purposes between corporate affiliates; truncation of social security and credit card numbers; and the release of free credit reports by credit reporting agencies. In addition, Section 711 of the FACT Act removes the sunset provision from §1681t of the FCRA, thus making the preemption offered thereunder permanent.

Congress chose to leave it to the Federal Trade Commission (the "FTC") and the Federal Reserve (collectively "the Agencies") to draft regulations setting effective dates for most of the provisions of the FACT Act. Section 3 of the FACT Act required the Agencies to prescribe final regulations by February 4, 2004 to establish effective dates for those provisions for which the FACT Act itself does not provide an effective date. In mid-December 2003, the Agencies issued joint interim rules that established December 31, 2003 as the effective date for those provisions that govern the relation of state law to areas covered under the FCRA; namely Sections 151(a)(2), 212(e), 214(c), 311(b), and 711 of the FACT Act. See, Joint Interim Final Rules, 68 Fed. Reg. 74467-02 (December 24, 2003). Following a public comment period, the Agencies’ final joint rules reaffirmed December 31, 2003 as the effective date for each of those preemption provisions. See, Effective Dates for the Fair & Accurate Credit Transactions Act of 2003 16 CFR § 602.1 (2004); 12 CFR § 222.1 (2004); as amended 69 Fed. Reg. 33281 (June 15, 2004).

Because the Agencies established the effective date of Section 711 of the FACT Act as the same day that the preexisting preemption provision would have otherwise expired, there was no lapse in the preemption offered under 15 U.S.C. §1681t. Further, because the pre-existing preemption provisions in §1681t were not changed by the FACT Act, it is reasonable to expect that the case law regarding the preemption of state law claims against furnishers of credit information will continue to evolve along the lines set out in Aklagi and Hasvold. Finally, the new preemption provisions set out in the FACT Act should protect financial services companies from a number of additional state law claims, including those relating to identity theft.

This article is presented for informational purposes only and is not intended to constitute legal advice.