Additional Thoughts on Adverse Action Notices at the SCOTUS

I wrote last night about the Supreme Court hearing arguments on GEICO’s and Safeco’s appeal for getting slapped for failing to provide adverse action notices.

I’ve now had the opportunity to read through the transcript of yesterday’s oral arguments. Although I need to disclaim that I’m neither a lawyer nor an avid SCOTUS-watcher, I can offer some thoughts.

First, the press coverage of the case has been rather vague as to what issue the court is actually facing here. It appears to be two-fold: first, what the definition of “adverse action” is; and second, what constitutes “willful noncompliance”. A good write-up of the issues can be found at SCOTUSBlog.

On “adverse action” — users of credit information are obliged to provide notice whenever an “adverse action” is taken. The problem is that at the federal level, what constitutes adverse action is undefined. The FTC has issued a not-legally binding opinion that says essentially “whenever a consumer is not offered the very-best-rate” it’s an adverse action, and many insurers have crafted their notification practices with this in mind.

Safeco, GEICO, and others have taken a different view — if your rates are increased, it’s an adverse action; but if your rates are decreased, it’s not. It’s an understandable interpretation at first glance, until you ask “increased/decreased from what?”

Even though I’m in the insurance industry, and spent a few years where part of my job was helping others respond to consumer complaints triggered by my then-employer’s notifications…I like the “not best rate” interpretation better than the “worse than baseline”.

There are too many games that can be played with defining “baseline”; for example, the initial round of scoring regulation in Utah, credit scoring was permitted to be used to define discounts only. Therefore, in Utah at that time, the baseline would have been the worst-possible-rate, and there would be no such thing as an adverse action under the baseline definition.

The reason for the notification requirement is that consumers ought to have the opportunity to know if an insurer’s/creditor’s evaluation is based on erroneous information, and to be able to request reevaluation after any errors are corrected.

True the notification requirements can be cumbersome, and scoring is an area that isn’t really conducive to easy explanation (the credit modelers I learned from used to do DOD work at Los Alamos; thus I can say that credit scoring really is rocket science). As a practical matter, the adverse action notices will be buried in a bunch of the informational crap that accompanies apps and dec pages, and most consumers will probably not read them. But at least the opportunity is there should the consumer choose to exercise it.

However, reading through yesterday’s transcript, it seems like the Justices are leaning towards the GEICO/Safeco view rather than mine. For example, from page 23 of the transcript, Justice Breyer comments:

The statute says an adverse action is an increase in a charge for — in connection with underwriting. [...] And then it says an increase is — and if you take an adverse action, i.e., if you increase it, and your increase is based in whole or in part on information contained in a consumer report, you have to send the thing.

Patricia Millett, representing the U.S. Solicior General’s office offered a good example of how an improvement might still be adverse:

[I]n my office, if everybody in the hallway gets a 5 percent salary increase and I only get a 1 percent salary increase, I am certainly better off, but if the reason I got a lesser increase is because of my gender or because of my credit report, it’s an adverse action.

On the question of how “willful noncompliance” is defined, I’m not sure I’m really comfortable addressing that point in too great a detail.

There appears to be documentation in the case files indicating that some folks at the insurers were at least aware of the more pro-consumer interpretation of “adverse action” and may have even agreed with it…or at least thought it worthy of adhering to.

Similarly, there is also apparently evidence that senior managers opted to decline that interpretation, and instead stuck to the somewhat arbitrary “increase from baseline” interpretation.

Part of the potential penalties for noncompliance are tied to the question of whether that noncompliance was willful…and therefore “willful” must be defined.

From there the question devolves into a lot of legal mumbo-jumbo on trying to precisely define a simple word…from which my head threatens to explode in a poof of lawyers’ logic. So I’ll stop there, other than observing that some of the justices comments would leave me uncomfortable with the potential ramifications in potential class action suits down the road.

It’ll be interesting to see what the ruling actually is, when it’s handed down in a few months.