October 27, 2006
Dear City Administrator:
You have the following question: Can the city use a utility service applicant’s credit report as a basis for determining the size of the applicant’s utility deposit (not to approve or deny a utility applicant’s application for utilities)?
That question implicates two federal laws: the Fair Credit Reporting Act (FCRA), and the Equal Credit Opportunity Act (ECOA). Those laws serve different purposes, but contain similar notice requirements. The federal rules implementing those acts are a mind-bending mess to interpret and apply, particularly with respect to the ECOA. Generally, under the FCRA, if the utility can show a legitimate business need for using credit reports in making utility service decisions, its main concern is complying with the notice provisions in that Act. Under the ECOA, there are notice requirements similar to those in the FCRA, but there are also a labyrinth of federal rules and regulations on precisely what information can be used by the utility service provider to make credit decisions. In addition, like most federal laws designed to protect consumers both the FCRA and the ECOA have been read very broadly by the agencies that draft the regulations implementing those laws, and by the courts.
But apparently, the answer to your question is yes. However, in light of the recent case of Baynes v. Alltel Wireless of Alabama, 322 F. Supp.2d 1307 (M.D. Ala. 2004), I would advise the city that where it increases the security deposit based on the credit report it treat that action as “adverse action” under both the FCRA and the ECOA. [Also see Mick v. Level Propane Gases, Inc., 183 F. Supp.2d 1014 (S.D.Ohio. 2000).] Baynes v Alltel Wireless of Alabama is discussed in more detail below.
Your Question under the FCRA
In Williams v. AT & T Wireless Services, Inc., 5 F.Supp.2d 1142 (W.D. Wash. 1998), the plaintiff was required to advance a $700 security deposit as a condition of receiving cell phone service, based on his credit report. The plaintiff alleged a violation of the FCRA on the grounds that the defendant obtained the credit report without a permissible purpose, and a violation of the ECOA on the ground that the defendant did not give him notice of adverse credit action taken against him, as required by that Act.
The Court held that a consumer’s application for service was a “credit transaction” within the meaning of the FCRA because it involved the purchase of services and a deferral of payment for those services (billing on a monthly basis). But the Court held that the defendant had obtained the credit report for a “legitimate business need for the information in connection with a business transaction involving the consumer,” as permitted by the FCRA. [15 U.S.C. 1631b(3)(A).] But the Court also held that the applicant for service was not entitled to the “adverse action” notice required to be provided to an applicant for credit under the ECOA because under the federal rules implementing that Act, the credit at issue was “incidental credit.” More will be said about “incidental credit” below.
It appears that the City’s use of credit reports for determining the size of utility deposits reflects a “legitimate business need...” as required by the FCRA.
The express question of whether using the credit report to increase the security deposit, as opposed to denying credit, was subject to the FCRA arose in Alltel, above. The Court held that the answer was yes.
The defendant in Alltel argued that “[a]t most, the transaction alleged in the complaint involves ‘incidental credit’ which is expressly exempt from the FCRA notice requirement.” The Court did not agree, declaring that while the transaction might have been “incidental credit,” and exempt from the notice requirements under the ECOA, the same was not true under the FCRA. “Therefore,” concluded the Court,
when a wireless provider acts with a permissible purpose pursuant to the legitimate business catch-all provision in obtaining a consumer report to determine if a higher security deposit will be changed based upon negative credit information contained in that consumer report, the taking of an adverse action against the consumer based on that report triggers the FCRA notification requirements. [At 1313]
Your Question under the ECOA
The ECOA prohibits discrimination against applications for credit on the basis of race, color, religion, national origin, sex, marital status or age. It also requires that “creditors” notify applicants for credit of “adverse action” within 30 days of such action. The ECOA prohibits discrimination against applications for credit on the basis of race, color, religion, national origin, sex, marital status or age. It also requires that “creditors” notify applicants for credit of “adverse action” within 30 days of such action. “Adverse action” means a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested. [15 U.S.C. § 1691(d)(6).]
The U.S. Sixth Circuit Court of Appeals in Mays v. Buckeye Rural Electric Cooperative, Inc., 277 F.3d 873 (2002), considered the question of whether the federal rules that implement the ECOA [but not the FCRA] applied to the claims of a female based on the grounds that the electric cooperative’s denial of utility service to her in her individual name was a violation of the ECOA. She and her husband had previously obtained utility service from the electrical cooperative, and upon their subsequent divorce had left a balance owing to the cooperative. The female applied for utility service from the electrical cooperative in her individual name, and the electrical cooperative initially denied her service until the outstanding balance on the account was paid, but subsequently notified her that it would provide her service in her individual name if she could document her separation or divorce, and if she could document her former husband’s individual responsibility for the disconnected account.
The Court held that the extension of credit by the defendant electrical cooperative was “incidental credit,” which is exempt from some of the regulations in the federal rules implementing the ECOA, including the notice of “adverse credit action.” For that reason, it rejected the claims of the plaintiff female.
Buckeye is a particularly important case because Tennessee is in the Sixth Circuit, the decisions of which apply to Tennessee. However, this case does not appear helpful to Tennessee municipal utilities because its holding does not appear to apply to municipal utility providers in Tennessee.
“Incidental credit” is defined by 13 CFR § 203.3(c) as
(1) .... Incidental credit refers to extensions of consumer credit other than the types listed in paragraph (a) [public utilities credit] and (b) [securities credit] of this section:
(I) That are not made pursuant to the terms of a credit card account;
(ii) That are not made subject to a finance charge....
(iii) That are not payable by agreement in more than four installments.
“Public utilities credit” is defined by 12 CFR § 202.3(a)(1) as:
(1).... Public utilities credit refers to extensions of credit that involve public utility services provided through pipe, wire, or other connected facilities, or radio or similar transmissions (including extensions of such facilities) if the charges for services, delayed payment, and any discount for prompt payment are filed with or regulated by a government unit. [Emphasis is mine.]
The Buckeye Court concluded that:
Extensions of incidental credit are extensions other than for “public utilities credit,” and “securities credit.” [FN 3] and are: (1) not made pursuant to terms of a credit card account; (2) not subject to a finance charge, as defined in § 226.4; and (3) not payable in more than four installments by agreement. § 202.3(c)(2). According to an affidavit provided by Defendant Parker, Defendant Buckeye has no credit card accounts, does not permit installment payments for electrical service, and does not impose finance charges. [At 878]
The same thing might be true of City’s utility services. But the Court said this in Footnote 3 of that case:
Extensions of “public utilities credit,” involve the provision of utility services by an entity required to file its rates with a governmental agency, see § 202.3(a)(1)....The parties agree that Defendant’s credit extensions do not qualify as “public utilities” credit because Defendants are not obligated to file their rates with any governmental entity.
The Buckeye Court does not go into the reason that the rates of an electrical cooperative in Ohio are not filed [or regulated] by a governmental unit; presumably, the reason is similar to the reason the rates of an electrical cooperative in Tennessee are not required to be filed with [or regulated] by a governmental unit: electrical cooperatives are private membership entities. [See Tennessee Code Annotated, § 65- 25-101 et seq.; Tennessee Attorney General’s Opinion 97-154.] Tennessee Code Annotated, § 65-25-101-223 expressly exempts electrical cooperatives from regulation by the Tennessee Regulatory Authority, and nothing in the electric cooperative statutory scheme, nor in any other general law that I can find, requires such cooperatives to file their rates with any governmental unit.
The rates of most municipal utilities are neither “filed with” nor “regulated by” a The rates of most municipal utilities are neither “filed with” nor “regulated by” a separate governmental unit, but they are certainly filed with, and regulated by, a governmental unit–either the municipal utility itself or the governing body of the city, by ordinance or resolution. Indeed, in your City, water and sewer rates are established by ordinance, codified in § 18-107 of the city’s municipal code. For those reasons, it does not appear that municipal utilities in Tennessee generally, and your City’s utilities in particular, can claim that their credit transactions reflect “incidental credit.”
Moreover, the Buckeye Court itself, adopted the analysis of Williams v. AT& T Wireless Services, above, on the application of the ECOA to credit discrimination issues. That action probably makes it clear that the Sixth Circuit’s view is that public utilities extend credit in their provision of utility service, and that where utility rates are subject to governmental filing or regulation, the “incidental credit” provisions of the ECOA do not apply to exempt them from the “adverse action” notice provisions of that Act and from certain federal regulations implementing that Act.
....Williams v. TT&T Wireless Servs. Inc., 5 F.Supp.2d 1142 (W.D.Wash. 1998)....reached a similar conclusion when it analyzed a cellular telephone companies compliance obligation under the ECOA. The court liked the provision of cellular telephone service to the provision of gas, electricity, and water, noting that consumers in all four cases incur debt as they use the services and receive periodic bills for the services used [Citation omitted by me.] The court concluded that cellular telephone companies like utility companies, provide credit to their customers within the meaning of the ECOA. Id. The court distinguished the defendant’s activities from public utility credit because its rates were not subject to government regulation, but concluded that the defendant satisfied the three essential element for incidental credit. Id at 1145-47 & n. 1. According to the Williams court, the cellular telephone company did not involve credit card accounts, finance charges, or installment payments. Id at 1147. As an incidental creditor, the defendant cellular phone company was due the compliance exemptions of § 203.3(c)(2).
Williams gives further instruction on what constitutes a “publ ic utility credit,” by pointing to the Official Staff Interpretation of that term in Regulation B [Which contains many of the regulations implementing the ECOA]:
1. Definition. This definition applies only to credit for the purchase of a utility service, such as electricity, gas, or telephone services. Credit provided or offered by a public utility for some other purpose–such as financing the purchase of a gas dryer, telephone equipment, or other durable goods, or for insulation or other home improvements–is not excepted.
2. Security deposits. A utility company is a creditor when it supplies utility service and bills the user after service has been provided. Thus, any credit term (such as a requirement for a security deposit is subject to the regulation. [At 1146]
Further, said Williams:
Pursuant to Regulation B, public utilities extending credit are exempt from some, but not all, of the provisions of the ECOA. See 12 CFR § 203.3(a) and Official Staff Interpretation thereof, Part 22, Suppl 1. The “limited exceptions” do not except public utilities from the notice provisions at issue here.[At 1146]
The Court goes on to conclude that the notice of “adverse action” provisions of the ECOA apply. [Note that Williams held that the similar notice provisions under the FCRA did not apply, a holding with which Alltel Wireless of Alabama, Inc., rejected..]
As I pointed out above, Buckeye did not involve any claims under the FCRA.
I have enclosed 15 U.S.C.A. § 1691, 15 U.S.C.A. § 1681m, and all of Regulation B. I omitted the annotations, etc. to 15 U.S.C.A § 1591, and 15 U.S.C.A. § 1681m. The appendices to Regulation B contain sample notice forms that appear to satisfy the notice provisions of both the FCRA and the ECOA.
It occurs to me that some training in this area would help both MTAS staff and Tennessee municipalities. I do not know what opportunities are available to that end, but if you are interested, I will check and let you know.
Let me know if I can help you further in this or any other matter.
Sidney D. Hemsley
Senior Law Consultant