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National Automobile Dealers Association v. Federal Trade Commission

May 22, 2012


The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge


The National Automobile Dealers Association ("NADA") challenges the Federal Trade Commission's ("FTC" or "Agency") interpretation of the meaning of "uses a consumer report" in the amended Fair Credit Reporting Act ("FCRA"), 15 U.S.C. § 1681m(h). As set forth in a preamble to amended regulations related to "risk-based pricing" of consumer credit, the FTC contends that an automobile dealer that does not obtain a consumer report nonetheless "uses" it when the dealer executes a credit contract based upon a third-party financing source's use of the consumer report. NADA contends that this interpretation violates the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 et seq., claiming that it is (1) ultra vires and (2) arbitrary, capricious, or otherwise not in accordance with law. Before the Court are the FTC's motion to dismiss and NADA's motion for summary judgment. For the reasons explained herein, the FTC's motion will be granted and NADA's motion will be denied.*fn1



In 2003, Congress enacted the Fair and Accurate Credit Transactions Act of 2003 ("FACT Act" or "Act"), Pub. L. No. 108-159, 117 Stat. 1952, to "prevent identity theft, improve resolution of consumer disputes, improve the accuracy of consumer records, [and] make improvements in the use of, and consumer access to, credit information." Id. The FACT Act amended the FCRA by adding, among other things, a provision that governs the "[d]uties of users in certain [consumer] credit transactions." 15 U.S.C. § 1681m(h). That provision addresses a practice known as "risk-based pricing" and provides statutory protections for consumers who, based on information contained in their "consumer report[s],"*fn2 are offered credit at "materially less favorable [terms] than the most favorable terms available to a substantial proportion of consumers." Id. § 1681m(h)(1).*fn3 In such circumstances, prospective buyers are entitled to receive a "risk-based pricing notice" ("RBPN") alerting them to the potential existence of negative information in their credit reports so that they can check their credit histories and correct any inaccuracies. Id. at 41,603. Specifically, the creditor must explain that information in the credit report was a factor in setting the unfavorable interest rate, how the consumer can obtain his or her credit history report, and how to correct false or incomplete data. Prior to the 2003 amendment, consumers were not entitled to receive such notice upon receiving less favorable credit terms; they only received notice for more drastic "adverse actions," such as denial of a loan. These RBPNs must be provided to consumers by "any person" who "uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit." 15 U.S.C. § 1681m(h)(1) (emphasis added).

The Act also required the FTC to prescribe regulations to carry out the new risk-based pricing law, including set the "form, content, time, and manner of delivery of any notice under this subsection," establish exceptions to the notice requirement, and "clarify the meaning of terms used in this subsection." 15 U.S.C. § 1681m(h)(6).*fn4 Accordingly, on May 19, 2008, the FTC initiated notice-and-comment rulemaking proceedings by publishing a notice of proposed rulemaking and soliciting comments from interested parties. Fair Credit Reporting Risk-Based Pricing Regulations; Proposed Rule, 73 Fed. Reg. 28966 (May 19, 2008).

NADA and two other associations in the automobile dealer industry submitted letters in which they argued that automobile dealers should be exempt from providing an RBPN when they engage in "three-party" financing transactions; that is, when the dealer agrees to extend financing to a consumer and then immediately assigns the loan to a third party, such as a bank or finance company. (App. at 64-82 (public comment letters dated August 2008).) In these circumstances, NADA explained, it is the third-party financing company, and not the dealer, that does the risk-based pricing, for it is the financing company that evaluates the consumer's credit and proposes a wholesale interest rate (the "buy" rate) at which it will underwrite the auto loan. (Id. at 63.) The dealer relies on the "buy" rate to offer the consumer an auto loan at a higher retail interest rate than is available to car buyers with better credit histories. (Id.) Therefore, NADA argued, the obligation to provide the RBPN should fall on the financing sources that set the risk-based price and not on the auto dealers. (Id. at 66.)

On January 15, 2010, the FTC adopted the Fair Credit Reporting Risk-Based Pricing Regulations. 75 Fed. Reg. at 2724-84. In the final regulations, it addressed-and rejected- NADA's argument, concluding that an initial creditor,*fn5 such as an auto dealer, must provide the RBPN within the context of three-party transactions. Id. at 2730, 2759, 2775-76; see 16 C.F.R. § 640.6(b); 12 C.F.R. § 222.75(b). Specifically, the Agency took the position that auto dealers that are original creditors are considered to "use" the credit reports to determine which third-party financing source to approach for financing, even if they do not set the risk-based price, and therefore fall within the purview of § 1681m(h). 75 Fed. Reg. at 2730.

On January 5, 2011, a few days after these rules took effect, NADA sought formal guidance from the FTC on whether this requirement applied to auto dealers that are initial creditors in three-party transactions and do not obtain a copy of the credit report ("Non-Consumer Report Dealers"), but instead, they leave it to the financing sources to obtain one. (See App. at 167-73 (Jan 5, 2011 letter from NADA to the FTC).) In this circumstance, the financing source usually obtains the consumer report, but the auto dealer does not and therefore, NADA argues, the dealer cannot be said to "use" the credit report. (Id.)

In March 2011, the FTC initiated a new rulemaking proceeding to amend the risk-based pricing regulations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), Pub. L. No. 111-203, 124 Stat. 1376 (2010). Fair Credit Reporting Risk-Based Pricing Regulations, Notice of Proposed Rulemaking, 76 Fed Reg. 13902 (Mar. 15, 2011).*fn6 At the FTC's suggestion, NADA submitted its January 5, 2011 inquiry as a comment in this recently-initiated rulemaking proceeding. (App. at 173-74; see also id. at 167-72.)*fn7

On July 15, 2011, the FTC promulgated amendments to the Fair Credit Risk-Based Pricing Regulations. The amendments, codified at 16 C.F.R. Part 640, "require disclosure of credit scores and information relating to credit scores in [RBPNs] if a credit score of the consumer is used in setting the material terms of credit." 76 Fed. Reg. at 41,602.

In the preamble to the amended rule, the FTC published a section entitled "Supplementary Information" which included responses to various submissions received during the notice-and-comment period. See 76 Fed. Reg. at 41,602-26. In this section, the FTC set forth its Interpretation of the scope of the word "uses" as employed in § 1681m(h) of the amended FCRA ("Interpretation"). 76 Fed. Reg. 41,606-07 & nn. 5-9. The FTC rejected NADA's suggested interpretation and construed § 1681m(h) to apply to an automobile dealer that uses consumer reports to offer materially less favorable credit terms to car buyers-even when the dealer "does not directly obtain the consumer report[s] and/or credit score[s] from a consumer reporting agency," but instead it takes an action based on the decision of a third-party financing source that relies upon the consumer report. 76 Fed. Reg. at 41,606.

It is this interpretation that plaintiff challenges here. Specifically, NADA asserts that the Interpretation of § 1681m(h) violates the APA.*fn8 In Count I, it claims that the FTC's interpretation exceeds the FTC's statutory authority in violation of 5 U.S.C. § 706(2)(C). (Compl. ¶¶ 36-42.) In Count II, it claims that the FTC's interpretation should be set aside under 5 U.S.C. § 706(2)(A) as arbitrary, capricious, or otherwise not in accordance with law. (Compl. ¶¶ 43-54.)



Although motions to dismiss and for summary judgment are normally judged under different legal standards, the inquiry in this case is the same. See Marshall Cnty. Health Care Auth. v. Shalala, 988 F.2d 1221, 1222-23 (D.C. Cir. 1993) ("The district court may, however, examine matters of public record in ruling on a Rule 12(b)(6) motion, and when a district court is reviewing agency action-sitting as an appellate tribunal-the legal questions raised by a 12(b)(6) motion and a motion for summary judgment are the same.") However, since it is "the better practice," id. at 1226 n.5, the Court will convert defendant's motion to dismiss into a motion for summary judgment.

Under Federal Rule of Civil Procedure 56(c), summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). In a case involving review of a final agency action under the APA however, the standard set forth in Rule 56(c) does not apply because of the limited role of a court in reviewing the administrative record. See Nat'l Wilderness Inst. v. U.S. Army Corps of Eng'rs, No. 01-0273, 2005 U.S. Dist. LEXIS 5159, 2005 WL 691775 at *7 (D.D.C. Mar. 23, 2005); see also Nw. Motorcycle Ass'n v. U.S. Dep't of Agric., 18 F.3d 1468, 1472 (9th Cir. 1994) ("[T]his case involves review of a final agency determination under the [APA]; therefore, resolution of th[e] matter does not require fact finding on behalf of this court. Rather, the court's review is limited to the administrative record."). Summary judgment thus serves as the mechanism for ...

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