Whitfield v. Radian Guaranty Inc ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
8-30-2007
Whitfield v. Radian Guaranty Inc
Precedential or Non-Precedential: Precedential
Docket No. 05-5017
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 05-5017
WHITNEY WHITFIELD;
CELESTE WHITFIELD,
on behalf of themselves and all others similarly situated,
Appellants
v.
RADIAN GUARANTY, INC.
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 04-cv-00111)
District Judge: Honorable Juan R. Sanchez
Argued January 19, 2007
Before: SLOVITER, RENDELL, and
CUDAHY,* Circuit Judges
(Filed: August 30, 2007)
*
Hon. Richard D. Cudahy, United States Senior Circuit
Judge for the United States Court of Appeals for the Seventh
Circuit, sitting by designation.
Joseph C. Kohn
Christina D. Saler
Kohn, Swift & Graf, P.C.
Philadelphia, PA l9107
Terry A. Smiljanich (Argued)
Kathleen Clark Knight
Tamra C. Givens
James, Hoyer, Newcomer & Smiljanich, P.A.
Tampa, FL 33609
Attorneys for Appellants
David Smith (Argued)
Nancy Winkelman
Theresa E. Loscalzo
Jessica W. Troiano
Schnader Harrison Segal & Lewis LLP
Philadelphia, PA l9103
Attorneys for Appellee
William Blumenthal
General Counsel
John F. Daly
Deputy General Counsel for Litigation
Lawrence DeMille-Wagman (Argued)
Federal Trade Commission
Washington, DC 20580
Attorneys for Amicus Curiae,
Federal Trade Commission in Support of Appellants
2
Jeremiah S. Buckley
Matthew P. Previn
Jonathan D. Jerison
Kirk D. Jensen
Buckley Kolar, LLP
Washington, DC 20037
Attorneys for Amici Curiae,
Mortgage Insurance Companies of America and
Mortgage Bankers Association, and Consumer Mortgage
Coalition in Support of Appellee
OPINION OF THE COURT
SLOVITER, Circuit Judge.
The issue presented in this appeal is whether the adverse
action notice provisions of the Fair Credit Reporting Act
(“FCRA”) apply to the actions of a company that provides
mortgage guaranty insurance (“MI”) to a mortgage lender at a
premium rate that is determined, in part, by information in the
mortgage borrower’s credit report. Our decision is informed in
part by the recent opinion of the United States Supreme Court in
Safeco Insurance Co. v. Burr, 127 S. Ct. 2201 (2007).
I.
In 2001, Whitney and Celeste Whitfield (the
“Whitfields”) contracted to build a new home in Virginia. They
wanted to finance all but 2% of the purchase price of their new
home. The Whitfields, who had a poor credit history, enlisted a
mortgage broker to facilitate the process and he helped them
contact the eventual mortgagee, Countrywide Home Mortgage.
Countrywide agreed to provide the Whitfields with a
mortgage which loaned them 98% of the purchase price on
condition that the Whitfields pay for mortgage insurance. After
the mortgage papers were signed, Countrywide requested
appellee Radian Guaranty, Inc. to provide the mortgage
3
insurance, which Radian agreed to do for a monthly charge of
$905.74.1 Countrywide provided the Whitfields with a
disclosure statement that informed them the cost of the mortgage
insurance. Radian based the price of the mortgage insurance on
the loan-to-value ratio of the mortgage and on Mr. Whitfield’s
credit score, which Countrywide obtained from Mr. Whitfield’s
consumer credit report. In the mortgage closing packet,
Countrywide gave the Whitfields the credit report upon which it
had relied.
In accordance with the mortgage guaranty insurance
process, Radian prepares and files its rate schedule for mortgage
guaranty insurance with the Virginia Bureau of Insurance. After
the Bureau has approved Radian’s proposed rates, lenders,
including mortgagees, are free to access the MI’s rate schedule
and place their orders online by entering the borrower’s credit
score and loan-to-value ratio. If Radian accepts the lender’s
application for guaranty insurance, it sends a confirmation letter
to the lender. On the other hand, if it rejects the application it
sends an adverse action notice to the borrower. Three days after
Countrywide closed the mortgage with the Whitfields, it
submitted an electronic order to purchase mortgage guaranty
insurance from Radian. Countrywide then passed this cost along
to the Whitfields, as had been agreed upon at settlement.
The Whitfields were required to set up an escrow account
to pay the cost of the premiums. Countrywide paid the
premiums to Radian, regardless of whether the Whitfields’
escrow account contained sufficient funds to pay the cost of the
premium. There were, however, sufficient funds in the
Whitfields’ escrow account; in fact the Whitfields were due, and
did receive, a refund for unearned premiums directly from
Radian in the amount of $542.15.
Radian conceded that had Mr. Whitfield’s credit score
been higher, it would have charged a lower premium for the
mortgage insurance, and in turn, the Whitfields would have paid
1
The Whitfields state that the premium was $903.58, but
we need not resolve the difference.
4
a lower premium for mortgage insurance. The Whitfields were
not provided with an adverse action notice by Radian. Indeed, it
is Radian’s standard policy not to send adverse action notices to
borrowers when the lender’s application for MI is approved.
The Whitfields filed suit in January 2004, alleging that
Radian did not provide them with an adverse action notice as
required by the FCRA, 15 U.S.C. § 1681m(a). They asked the
District Court to certify a class, composed of borrowers who
paid more than the lowest rate for private mortgage insurance
and were not notified of the adverse action. The District Court
granted Radian’s motion for summary judgment, which had the
effect of rendering the Whitfields’ motion for class certification
moot. Whitfield v. Radian Guaranty, Inc., 395 F. Supp. 2d 234
(E.D. Pa. 2005). The Whitfields filed a timely notice of appeal.
II.
The District Court had jurisdiction pursuant to 15 U.S.C.
§ 1681p and 28 U.S.C. § 1331. This court has jurisdiction
pursuant to 28 U.S.C. § 1291.
This court exercises plenary review of the District Court’s
grant of Radian’s motion for summary judgment. Further, this
court applies the same standard in reviewing a motion for
summary judgment as the District Court. MBIA Ins. Corp. v.
Royal Indem. Co., 426 F.3d 204, 209 (3d Cir. 2005). A motion
for summary judgment should only be granted if there are no
genuine issues of material fact and the moving party is entitled
to judgment as a matter of law. Fed. R. Civ. P. 56(c). All
reasonable inferences must be drawn in favor of the non-moving
party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574, 587 (1986).
III.
A. Relevant Statutory Provisions
The FCRA requires that if a person who is a permissible
user of information from a consumer report (also known as a
credit report) takes any adverse action against an individual,
5
such person shall notify the individual of the adverse action. We
set out the relevant provision:
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;
(2) provide to the consumer orally, in writing, or
electronically –
(A) the name, address, and telephone number of
the consumer reporting agency . . . that furnished
the report to the person; and
(B) a statement that the consumer reporting agency
did not make the decision to take the adverse
action and is unable to provide the consumer the
specific reasons why the adverse action was taken;
and
(3) provide to the consumer an oral, written, or
electronic notice of the consumer’s right –
(A) to obtain, under section 1681j of this title, a
free copy of a consumer report on the consumer
from the consumer reporting agency referred to in
paragraph (2), which notice shall include an
indication of the 60-day period under that section
for obtaining such a copy; and
(B) to dispute, under section 1681i of this title,
with a consumer reporting agency the accuracy or
completeness of any information in a consumer
report furnished by the agency.
15 U.S.C. § 1681m(a).
The definition of “adverse action” in the FCRA includes
an insurance prong, a credit prong, and a catch-all provision.
Section 1681a(k)(1)(A) is referred to as the credit prong, §
1681a(k)(1)(B)(I) is referred to as the insurance prong, and
§1681a(k)(1)(B)(iv) as the catch-all provision. The District
Court analyzed the transaction under the insurance prong, and
we agree that the transaction at issue falls within the insurance
6
prong.
The District Court also stated that charging a higher
initial rate for insurance would be an “adverse action.”
Whitfield, 395 F. Supp. 2d at 237. The FCRA defines the term
“adverse action” as it applies to an insurance company as
follows:
(k) Adverse action. –
(1) Actions included. – The term “adverse action” –
....
(B) means –
(i) 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[.]
15 U.S.C. § 1681a(k)(1)(B)(i).
The Act defines “consumer report,” so far as relevant
here, as:
any written, oral, or other communication of any
information by a consumer reporting agency
bearing on a consumer’s credit worthiness, credit
standing, [or] credit capacity . . . which is used or
expected to be used or collected in whole or in part
for the purpose of serving as a factor in
establishing the consumer’s eligibility for . . .
credit or insurance to be used primarily for
personal, family, or household purposes[.]
15 U.S.C. § 1681a(d)(1)(A).
The District Court noted that the transaction at issue in
this case was between Radian, the mortgage insurer, and
Countrywide, the lender. It cited approvingly the decision in
Hinton v. Federal National Mortgage Ass’n, 945 F. Supp. 1052
(S.D. Tex. 1996), where the court, on facts substantially similar
7
to those here, stated that the lender is the insured, not the
borrower, because the contract is between the mortgage insurer
and the lender. Id. at 1055. The Hinton court held that the
borrower was an incidental beneficiary who had no cause of
action. Id. at 1058. The District Court in this case granted
summary judgment for Radian because it found that Radian’s
insurance relationship was with Countrywide and not the
Whitfields.
B. The Safeco decision
The Safeco decision, 127 S. Ct. 2201, encompassed two
separate cases, Safeco Insurance Co. v. Burr and GEICO
General Insurance Co. v. Edo, both of which involved challenges
to the failure of the insurance company to provide the adverse
action notification required under the FCRA. In the course of its
opinion, the Court read the statutory language “willfully fails to
comply” as reaching reckless FCRA violations and rejected the
insurance companies’ argument that the use of the term
“willfully” limits liability under § 1681n(a) to knowing
violations. Id. at 2210. The Court noted that if it were to adopt
the companies’ interpretation, the use of “knowingly” in §
1681n(a)(1)(B), which sets higher damages for knowing
violations, would be superfluous. Id.
The Court next resolved a dispute between the courts of
appeals by holding that the “increase” referred to in the statute
encompasses initial rates for new applications. Id. at 2211. The
Court determined that a rate is “based on” a credit report if there
is a but-for causal relationship, i.e., the credit report must have
been the basis for the increase. Id. at 2212. Finally, the Court
rejected the Government’s argument that the baseline should be
the best possible premium rate. Id. at 2213. Instead, the Court
held that the baseline is what the applicant would have been
charged if the company had not taken the credit score into
account, i.e., the neutral rate. Id. at 2213-14.
Reviewing the record in the two cases before it, the Court
held that because the rate that GEICO offered to Edo was one he
would have received if his credit score had not been taken into
account, it had not violated the statute. Id. at 2214. There was
8
no record evidence as to any neutral rate with respect to Safeco,
but the Court held that plaintiffs could not prevail on their claim
against Safeco for willful violation of the FCRA because Safeco
had not acted recklessly. Id. at 2215. Safeco had interpreted the
statutory language to mean that no notice was required for its
initial dealing with the insured, and the Court stated that
although this was an incorrect interpretation it was not a reckless
one. Id.
Following the announcement of the opinion in Safeco,
this court asked the parties to comment on the effect of the
Safeco decision on the issues in this case. Radian responded
with essentially the same analysis applied by the District Court.
It focused on the fact that it had “sold a commercial insurance
product to a mortgage lender [Countrywide], not to a consumer.”
Letter from David Smith, counsel for Radian Guaranty Inc., to
the Court, at 1 (June 14, 2007) (on record with the Court). It
stated that the Whitfields were not a party to the insurance
transaction, that it completed its transaction with Countrywide
without ever receiving or considering the Whitfields’ consumer
report, that the only transaction to which the Whitfields were a
party was a separate credit transaction with Countrywide that
was completed three days before Countrywide ever contacted
Radian about purchasing mortgage guaranty insurance for itself,
and that therefore the District Court was correct in holding that
because Radian sold the mortgage insurance to Countrywide and
not to the Whitfields, there was no violation of the FCRA as a
matter of law. See id. at 4-7.
Radian then argued that in any event it did not act
willfully as a matter of law, relying on the Supreme Court’s
Safeco decision that the insurance company (Safeco) had acted
without “authoritative guidance” and therefore did not act
recklessly. Id. at 5. It also argued that it was not required to
give notice because it had not received any information
contained in any consumer report about the Whitfields, and
therefore it did not take any action based in whole or in part on
any information contained in a consumer report. Id. at 6.
In their response to the court’s inquiry, the amici, the
Mortgage Insurance Companies of America, stated that under
9
the precedent of Safeco, Radian could not have violated the
FCRA willfully, thereby continuing their support for Radian’s
position in this case. Letter from Kirk D. Jensen, counsel for the
Mortgage Insurance Companies of America, to the Court, at 2-3
(June 13, 2007) (on record with the Court).
Not surprisingly, the Whitfields view the Safeco decision
differently. Emphasizing the Supreme Court’s ruling that willful
conduct must be shown to have been “objectively unreasonable,”
the Whitfields noted that whether Radian acted willfully is not
an issue on appeal as the question formed no basis for the
District Court’s ruling and was not an issue raised on appeal by
either party. Letter from Terry A. Smiljanich, counsel for the
Whitfields, to the Court, at 2 (June 13, 2007) (on record with the
Court). Because “the record is incomplete as to all issues
involving determining whether defendant Radian’s actions were
or were not ‘objectively unreasonable,’” the Whitfields argued
that we should remand this case to the District Court. Id. They
noted the absence of evidence that Radian (unlike GEICO) had
no neutral score, and “that the Whitfields were punished with
extremely high mortgage insurance premiums specifically
because their credit scores were judged by Radian to warrant
such high premiums.” Id. at 3. They also noted that nothing in
the Safeco decision provides any basis for concluding that the
District Court was correct in “grafting either a ‘privity’
requirement or a ‘direct/indirect’ category onto the FCRA.” Id.
Thus, the Whitfields argued that we should allow them to
proceed with the case.
Finally, the Federal Trade Commission, which entered the
case as amicus curiae on behalf of the position of the Whitfields,
argued that “nothing in Safeco should have any impact on [our]
decision,” and agreed with the Whitfields that we should reverse
the District Court’s decision. Letter from Lawrence DeMille-
Wagman, counsel for the Federal Trade Commission, to the
Court, at 3 (June 13, 2007) (on record with the Court). It noted
that nothing in the Supreme Court’s Safeco decision addresses
Radian’s defense that it had no obligation to provide the
Whitfields with an adverse action notice. Id.
C. Analysis
10
The Supreme Court’s Safeco opinion disposes of one
issue that had arisen in the District Court but was uncontested on
appeal, namely whether an initial premium can be termed an
increase in any charge for insurance for purposes of the FCRA’s
definition of adverse action. Radian had argued that its sale of
mortgage guaranty insurance to Countrywide did not fall within
the FCRA’s definition of “adverse action” because the
Whitfields never had existing insurance with Radian. In
Radian’s brief, it argued that it never denied, cancelled,
increased, reduced, or otherwise changed the term of any
insurance with respect to the Whitfields.
As we noted above in discussing the District Court’s
decision, it agreed that a higher initial rate would be an adverse
action. Without amplification, it relied on the decision to that
effect in Broessel v. Triad Guar. Ins. Corp., No. Civ. A. 1:04CV-
4M, 2005 WL 2260498, at *1 (W.D. Ky. Sept. 15, 2005). The
Supreme Court’s Safeco decision clarifies that issue, which had
been the subject of differing views in the lower courts. The
Supreme Court agreed with the government that the statutory
“increase” reaches a first-time rate. It stated that “there is
nothing about insurance contracts to suggest that Congress might
have meant to differentiate applicants from existing customers
when it set the notice requirement; the newly insured who gets
charged more owing to an erroneous report is in the same boat
with the renewal applicant.” Safeco, 127 S. Ct. at 2211. It thus
held that “the ‘increase’ required for ‘adverse action,’ 15 U.S.C.
§ 1681a(k)(1)(B)(i), speaks to a disadvantageous rate even with
no prior dealing; the term reaches initial rates for new
applicants.” Id. at 2211-12.
Radian argued in its brief before us that it was not
required to give notice because it did not take any action “based
in whole or in part on any information contained in a consumer
report.” See 15 U.S.C. § 1681m. Radian argued that it never
had any information from a consumer reporting agency, but that
its rate was based in part on the credit score that it received from
Countrywide.
We reject that technical construction of the statutory
language. In discussing that statutory requirement the Supreme
11
Court stated “[i]n common talk, the phrase ‘based on’ indicates a
but-for causal relationship and thus a necessary logical
condition.” Safeco, 127 S. Ct. at 2212. Radian conceded that
the Whitfields’ credit score was a component of the premium
that it charged Countrywide for the mortgage guaranty
insurance. The statutory requirement that the adverse action
must be “based . . . on” a credit report is in the passive voice.
See 15 U.S.C. § 1681m. There is no doubt that Radian’s
premium for the mortgage insurance that the Whitfields were
required to pay was “based . . . on” information in the credit
report, albeit information supplied to Radian from Countrywide.
There is no reason to limit the statutory obligation to
provide notice to those cases where the insurance company
directly reads the credit report and exclude those cases where the
insurance company indirectly is advised of the results of the
credit report. The relevant fact is that the insurance company
used the credit information, i.e., the credit score, in establishing
the applicable premium for insurance that the borrowers were
required to pay. It makes no difference to the purpose of the Act
if the credit information was derived from Radian’s own reading
of the consumer credit report or was transmitted to it by
Countrywide based on its reading of the consumer credit report.
In either event, the consumer report would have been the cause
of the adverse action and thus the notice requirement applies.
Finally, we come to the crux of the District Court’s
holding: its determination that the FCRA notice requirement was
inapplicable because there was no privity between the Whitfields
(the ultimate consumers) and Radian. The privity issue did not
arise in Safeco because both Safeco and GEICO had direct
relationships with the borrowers. In this case, we have an
intermediate party, Countrywide, the mortgagee.
This precise factual situation arose in Broessel, where
Countrywide was the mortgagee and it selected Triad to provide
the mortgage insurance the day after the closing. 2005 WL
2260498, at *2. In its opinion, referred to by the District Court
here, the Broessel court rejected the insurance company’s
argument that it was not required to give notice because there
was no contractual relationship between it and the consumer.
12
The court stated:
Privity of contract is not a requirement under the
plain language of FCRA. See 15 U.S.C. §
1681m(a). FCRA states in pertinent part “that any
person who ‘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’ must provide ‘notice of the adverse action
to the consumer.”’ [15 U.S.C. § 1681m(a)] Triad
is “any person” and the Court has held that it took
an adverse action. The adverse action was with
respect to a consumer. The only question
remaining is whether the action was based on
information contained in the consumer’s credit
report.
2005 WL 2260498, at *5 (certain internal citations omitted). We
agree.
Triad, the insurance company in the Broessel case, argued
that it took no action based on the plaintiff’s credit report but
relied solely on the information contained in the insurance
application provided by Countrywide. Id. at *4. By
coincidence, Countrywide was also the mortgagee in this case
and Radian makes the same argument that the insurance
company made in Broessel. The District Court in Broessel
rejected that argument:
Notwithstanding the automatic nature of the
transaction, the determination of Broessel’s
mortgage insurance premium was based on
information which Triad used to determine the
premium for the mortgage insurance. Part of the
information used was Broessel’s credit score
which was derived from her credit report.
Whether that evaluation was done electronically or
otherwise is immaterial. The ultimate decision as
to the amount of her premium was based, in whole
or in part, on a consumer report. 15 U.S.C. §
1681m(a).
13
Id. at *5.
We agree with that analysis. If we were to accept
Radian’s argument, responsibility to provide notice would be
limited to the mortgagee. The Court of Appeals for the Ninth
Circuit rejected that interpretation of the statute. As the court
stated in Reynolds v. Hartford Fin. Ins. Servs., 435 F.3d 1081,
1095 (9th Cir. 2006), rev’d sub nom. on other grounds Safeco,
127 S. Ct. 2201, the definition of “any” (in the statutory
provision “any person who takes an adverse action is liable”)
“includes the plural.” Id. at 1095. Moreover, the court of
appeals noted that “[w]ith regard to insurance transactions,
liability attaches whenever an adverse action is taken ‘in
connection with the underwriting of insurance.’” Id. (quoting 15
U.S.C. § 1681a(k)(1)(B)(i)). The court noted that the broad “‘in
connection with’ language confirms that a variety of entities may
be liable.” Id. It further stated that “[n]o provision in the statute
nor comment in the legislative history suggests that Congress
intended that only a single company be responsible under FCRA
when a consumer is charged an increased rate for insurance.” Id.
Although Reynolds presented a parent-subsidiary relationship
and was discounted by the District Court for that reason, see 395
F. Supp. 2d at 238, we see no basis to make such a distinction.
We must construe the language of the statute in light of
its clear purpose. As the court stated in Treadway v. Gateway
Chevrolet Oldsmobile Inc., 362 F.3d 971, 981 (7th Cir. 2004),
“Congress enacted the FCRA in 1970 to address abuses in the
consumer reporting industry.” Those abuses were that reliance
was being placed on consumer reporting agencies that were too
often reporting inaccurate information. Id. The FCRA as well
as the Equal Credit Opportunity Act were designed to insure that
agencies report accurate information. Id. at 982.
If Radian had sent the Whitfields the required notice of
adverse action, the Whitfields would have been in a position to
correct any inaccurate information in their credit report and
thereby lower the price they would have to pay for credit in
future transactions. Indeed, the record shows that the Whitfields
might even have been able to lower the mortgage guaranty
insurance premium that they were obligated to pay in the present
14
transaction with Countrywide. The mortgage papers were
signed three days before Countrywide placed the request for
insurance with Radian, but the record does not indicate that the
Whitfields had no opportunity to adjust or correct the premium
after the mortgage transaction was set. In fact, the Whitfields’
obligation to pay any mortgage insurance premium was
eliminated long before their responsibility under the mortgage
ceased.
Finally, we turn to Radian’s argument that it cannot be
held liable under the FCRA because it did not act willfully, as
the Supreme Court held in Safeco with respect to Safeco. The
situations may not be analogous. The Supreme Court held that
Safeco’s reading of the statute to exclude initial rate offers for
new insureds was not objectively unreasonable. Safeco, 127 S.
Ct. at 2215. Radian too, following Safeco’s lead, argues that
“just as was the case in Safeco, the rate for the mortgage
guaranty insurance that Radian sold Countrywide was an initial
rate for a new insurance policy.” Letter from David Smith,
counsel for Radian Guaranty Inc., to the Court (June 14, 2007)
(on record with the Court). We leave it to the District Court on
remand to consider whether the evidence in the record supports
Radian’s claim that it did not willfully violate the statute because
it reasonably believed an initial rate offer was not an increase for
purposes of the definition of adverse action under the FCRA.
Radian also argued that it did not act willfully and thus cannot be
liable under the FCRA because its reading of the statute led it to
conclude that it had no responsibility for sending an adverse
action notice because its relationship was with Countrywide
rather than with the Whitfields.
Radian’s reading would be more plausible if it could
argue that it had no information with respect to the identity of
the purchasers and therefore was not in a position to send the
required notice. However, the record shows that Radian did in
fact send notice directly to prospective purchasers when it
declined to grant insurance covering their mortgages. It appears
that Radian sent those notices pursuant to the credit prong of the
FCRA – 15 U.S.C. § 1681a(k)(1)(A). That is a distinction
without a difference. The essential factual concession is that
Radian was in a position to identify and notify ultimate
15
purchasers notwithstanding that it had no direct relationship with
them.
We do not suggest that a factfinder could not or would
not determine that Radian did not act willfully. Instead, we hold
that whether it did so is a factual issue, not a question of law, and
it therefore cannot be decided either on appeal or by the District
Court as a matter of law.
IV.
For the reasons set forth above, we will reverse the
summary judgment entered by the District Court and remand for
further proceedings in accordance with this opinion.
16