Pre-emption
FACTA has a degree of built-in pre-emption of state laws. It prevents the states from imposing more-onerous regulations in many areas, including those related to information-sharing among affiliates.

Before FACTA, FCRA pre-empted state law in a number of areas. But by January 2004, it would have allowed the states to enact laws that provided more consumer protection than the federal law, if the state law specified explicitly that it was meant to supplement FCRA. FACTA eliminated the states’ ability to opt out of federal pre-emption beginning in 2004. In other words, the existing pre-emption provisions are now permanent.

FACTA also pre-empts state laws governing the subject areas of new provisions that it added to FCRA, including: risk-based pricing notices, credit-score disclosures (existing laws are grandfathered), annual free credit reports and other matters.

Other relevant provisions
FACTA has more provisions that impact the mortgage industry, including:

• Annual free credit reports for consumers: By Sept. 1, this provision will be phased in nationwide. Although increased access to credit files could generate more customer disputes for lenders, the FACTA provision also can be helpful to mortgage brokers and lenders. It helps borrowers correct problems with their files when there still is time to affect their loan eligibility.
• Limits on the use and sharing of medical information: These could make it more difficult for lenders to see if an applicant has the mental capacity to enter into a loan agreement. Federal banking agencies recently issued interim exceptions to these rules.
• Use of a model notice for lenders to report negative credit information: This applies to any financial institution as defined in the Gramm-Leach-Bliley Act; this includes any mortgage lender. The notice may be provided with a notice of default or billing statement but not with Truth in Lending Act disclosures. A lender may not report negative information until it has provided the notice.
• Disposal of consumer-report information and records: The FTC, federal banking agencies, the Securities and Exchange Commission and the National Credit Union Administration are required to issue “consistent and comparable” (but not joint) regulations or guidelines requiring the proper disposal of information from consumer reports. Examples of reasonable measures to dispose of consumer reports include burning, pulverizing or shredding papers containing consumer information; destruction or erasure of electronic media containing consumer information; and monitoring third parties engaged in record destruction.
• Truncation of credit- or debit-card numbers: Businesses may not print more than the final five digits of a credit- or debit-card number on an electronically generated point-of-sale receipt. This would appear to apply, for example, to a mortgage originator who accepts credit-card payments for appraisal and application fees. Since January, this provision has covered equipment that was in service as of Dec. 4, 2004. It covers new equipment effective Dec. 4, 2006.
• FCRA statute of limitations extension: FCRA lawsuits are allowed within five years of a violation. FACTA adds a discovery rule that also allows actions within two years of discovery. This rule overrules the U.S. Supreme Court decision in TRW vs. Andrews, 534 U.S. 19 (2001).
• Federal credit and theft studies: FACTA requires various federal agencies to study topics such as the impact of credit scoring on the availability and affordability of financial products (including the impact on minorities); the use of biometrics to prevent identity theft; and whether to tighten restrictions on the use of prescreened information.
• Creation of a Financial Literacy and Education Commission: FACTA creates a Financial Literacy and Education Commission to develop a strategy to increase consumer financial understanding. Agencies taking part include the U.S. Treasury, FRB, FTC and other federal banking agencies, plus other appointed officials.

FACTA is a sweeping revision of FCRA that imposes many new obligations on mortgage lenders and brokers.

Although many of these requirements create new compliance burdens, some of them also may generate opportunities for consumers to improve their credit position and qualify for more-attractive credit terms. The credit-score disclosure and the new risk-based pricing notice — if implemented to help consumers without burdening the industry — could help lenders and brokers educate their customers about the importance of checking their credit records before they begin the loan-application process.

Jonathan D. Jerison and Andrea Lee Negroni are attorneys with Buckley Kolar LLP in Washington, D.C. Jerison provides regulatory, legislative and transactional advice to mortgage lenders, servicers and insurers. He also defends mortgage and consumer-finance companies in government enforcement actions. He can be reached at (202) 349-8015. Negroni is an expert on the state licensing laws applicable to mortgage bankers and brokers. She can be reached at (202) 349-8032. Buckley Kolar’s Web site is www.buckleykolar.com.

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