Mortgage Daily

Published On: March 21, 2006
FTC Takes Position in M.I. Lawsuit

Agency claims higher M.I. premium constitutes adverse action

March 21, 2006


photo of Coco Salazar
The Federal Trade Commission weighed in on whether charging a borrower a higher mortgage insurance premium constitutes an adverse action.

The agency filed an amicus brief urging a reversal of a court’s ruling that Radian Guaranty Inc. was not required to provide a consumer with a Fair Credit Reporting Act adverse action notice despite that information in the consumer’s credit report led to a higher mortgage insurance premium.

The filing, made in the U.S. Court of Appeals for the Third Circuit for the case pending Whitfield et al v. Radian Guaranty Inc., addresses a lower court ruling that held the mortgage insurer was not required to provide a consumer with a FCRA adverse action notice even when, as a result of the information in a consumer report, the company charged a higher mortgage insurance premium, which was paid by the Whitfields.

While the court noted it disagreed with the decisions of three other district courts, it based its holding on the fact that the lender, Countrywide Home Mortgage, not the consumer, obtained the policy and was the policy’s beneficiary.

“Radian conceded that if Mr. Whitfield’s credit score had been higher, Radian would have charged a lower price for the mortgage insurance,” the FTC said in the brief. The “district court erred when it held that Radian had no obligation to provide the Whitfields with an adverse action notice.”

The court’s holding was “based on its misreading of the FCRA,” the FTC continued. “Instead of assessing whether Radian’s setting of a higher initial price constituted ‘adverse action with respect to’ the Whitfields … the court focused only on the fact that the Whitfields were not the beneficiaries of the mortgage insurance.

“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 and adverse action notice.”

Additionally, the commission says the court’s ruling was also based on “its misunderstanding of the central purpose of the adverse action notice,” as its balancing test concluded the consumers would not benefit from a notice after consummation of the credit transaction.

“The notice is not, as the court mistakenly believed, intended to assist the consumer in qualifying for the underlying transaction,” The FTC said. “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.”

Without such a notice, consumers may never know the potentially incorrect or incomplete information in their consumer reports that may lead to higher prices on their purchase and continue to adversely impact them in the future, the commission said.

The FTC says the district court ignored requirements imposed by Section 615 of the FCRA on users of consumer reports.

“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.”

“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,” the FTC concluded in the brief.

Coco Salazar is an assistant editor and staff writer for [email protected]

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