Recent court decisions have taken different approaches in evaluating whether a mailer is a “firm offer of credit,” with the Seventh Circuit courts requiring more details regarding the terms of the offer.

    The U.S. District Court for the Northern District of Illinois held that two “pre-screen” letters did not constitute firm offers of credit as required by the federal Fair Credit Reporting Act if a consumer’s credit report is obtained in connection with a transaction not initiated by the consumer. Murray v. Finance America, LLC, Case No. 05 C 1255 (N.D. Ill. April 4, 2006). The court held that Finance America’s mailers did not constitute firm offers of credit because the loan terms were too vague and conferred little or no value. In finding that the mailers conferred little or no value, the court referred to the fact that the mailers did not articulate the method by which interest would be computed, the length of time over which the loan would be repaid, whether a prepayment penalty applied, the amount of fees, costs, charges or points, or Finance America’s underwriting guidelines. The court relied on the Seventh Circuit’s decisions in Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004), and Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006), in reaching its conclusion that the mailers lacked value and were not firm offers of credit.

    Earlier this year, the same court issued an order granting summary judgment for a plaintiff who claimed that a creditor obtained her credit report for an impermissible purpose in violation of the FCRA. Kudlicki v. Farragut Financial Corp., o. 05 CV 2459 (N.D. Ill. Jan. 20, 2006). In Kudlicki the creditor sent the plaintiff a prescreened solicitation to refinance her vehicle at an interest rate “as low as 5.5% APR.” The solicitation provided no other details regarding credit terms but contained a statement that “[r]ates and terms [are] subject to change at any time.” The court concluded that this statement precluded the offer from being a firm offer of credit.

    In a similar opinion, the same court ruling on a lender’s motion to dismiss held that it could not find, as a matter of law, that the disputed mailer constituted a firm offer of credit. Asbury v. People’s Choice Home Loan, Inc., Case No. 05 C 5483 (N.D. Ill. Feb. 15, 2006). The mailer guaranteed a minimum loan amount of $20,000 and made it clear that the consumer was pre-approved for the offer, subject to meeting certain predetermined criteria of creditworthiness.

    Rejecting Cole, the U.S. District Court for the Northern District of California stated that the text of the FCRA does not support the position that a firm offer of credit cannot contain a range of credit or interest rates, or that it must be of sufficient “value” when judged by a later arbiter. Putkowski v. Irwin Home Equity Corp., 2006 WL 741387 (N.D. Cal. March 23, 2006). The plaintiffs argued that a statement of material terms that includes a loan amount ranging from $15,000 to $300,000 and an interest rate ranging from 5.65% to 24% is not sufficiently definite to constitute an offer because it is not enforceable. The court held that the mailer sets forth a firm offer of credit, as defined in the FCRA. The court noted that the mailer offered a minimum 20-year, $15,000 line of credit, with a maximum interest rate of 24%.

    The U.S. District Court for the Middle District of Louisiana declined to adopt Cole in deciding a firm offer of credit case citing to Fifth Circuit precedent finding that the FCRA permits a creditor to make a ‘conditional’ firm offer of credit; that is, an offer that is conditioned on the consumer meeting the creditor’s previously established criteria for extending credit. Pearson v. Novastar Home Mortgage, Inc., Case No. 05-1377-A (M.D. La. March 28, 2006). However, the court denied Novastar’s motion to dismiss finding that while there is no specific requirement in the FCRA that the essential terms of the offer be included in a written solicitation, nonetheless, a firm offer must be made, that is an offer that must be honored if it is determined that the consumer meets specific, pre-established criteria bearing on creditworthiness. The court found that the written solicitation received by Pearson raised questions about whether Novastar made a firm offer of credit, as the document was missing many of the essential terms of the credit transaction and there was no evidence regarding whether these terms existed or how they would be determined.

    Given the inconsistent opinions being issued by federal courts on this issue, it would be prudent for creditors to re-evaluate all “firm offers of credit” mailings with these decisions in mind.

    Darrell Dreher and Elizabeth Anstaett