LOCAL GOVERNMENT UTILITIES’ REQUIRED ISSUANCE OF ADVERSE ACTION NOTICES IN COMPLIANCE WITH THE FAIR CREDIT REPORTING ACT, EQUAL CREDIT OPPORTUNITY ACT, AND DODD-FRANK ACT

Ikee Gardner

University of North Carolina School of Law

Examples of NC local government utilities:City of Raleigh Public Utilities Department (water and sewer service)City of Durham Solid Waste ManagementCity of Durham Water ManagementOrange Water and Sewer Authority (OWASA)Town of Cary Utilities DepartmentTown of Apex Utility Services (electric, water, sewer, garbage, recycling, solid waste)

No. Sorry!

Adverse Action Illustrated

May I have water, gas, electricity, and waste disposal?

Some local government utilities run credit checks on potential utility customers and, based (at least in part) on the credit score, may refuse to provide service, require a deposit as a condition of receiving service, and/or charge a higher monthly rate for the service.

Three different federal laws require that a local government utility provide notice to the potential customer if one of the above actions is taken based, at least in part, on a credit score.

Local governments have the authority to engage in public enterprise activities (activities of a commercial nature which could be provided by the private sector).

• Counties may “acquire, lease as lessor or lessee, construct, establish, enlarge, improve, extend, maintain, own, operate, and contract for the operation of public enterprises in order to furnish services to the county and its citizens.” N.C.G.S. § 153A-275(a).

• Municipalities may “acquire, construct, establish, enlarge, improve, maintain, own, operate, and contract for the operation of any or all of the public enterprises…to furnish services to the city and its citizens.” N.C.G.S. § 160A-312(a).   

Authorized public enterprise activities include the operation of utilities.• Public enterprises for counties include water supply and

distribution, wastewater collection/treatment/disposal, solid waste collection, and stormwater management. N.C.G.S. § 153A-274. 

•  Public enterprises for municipalities include electric power generation/transmission/distribution, water supply and distribution, wastewater collection/treatment/disposal, and gas production/storage/transmission/distribution. N.C.G.S. § 160A-311. 

Local governments have the authority to charge fees and impose deposit requirements for public enterprise activities.• Counties may “establish and revise…schedules of rents,

rates, fees, charges, and penalties for the use of or the services furnished by a public enterprise” and can vary those schedules “according to classes of service.” N.C.G.S. § 153A-277(a).

• Like counties, municipalities may “establish and revise…schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by any public enterprise” and may vary those schedules “according to classes of service.” N.C.G.S. § 160A-314(a)

Local governments may run credit checks on potential or current customers and may deny service, implement a deposit requirement, or increase rates based on the credit score.

Counties may “adopt adequate and reasonable rules to protect and regulate a public enterprise belonging to or operated by it.” N.C.G.S. § 153A-275(b).

Cities “have full authority to protect and regulate any public enterprise system belonging to or operated by it by adequate and reasonable rules” N.C.G.S. §160A-312(b).

In Atlantic Construction Co. v. City of Raleigh, 230 N.C. 365, 369 (1949), the court held that the city had authority to charge reasonable connection fees and to otherwise “fix the terms upon which the service may be rendered and its facilities used.” 

Local government utilities have the right to run credit checks on potential customers under the Fair Credit Reporting Act (FCRA).

“Any consumer reporting agency may furnish a report… to a person which it has reason to believe intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer.” 15 U.S.C. 1681(b).

Creditors have special responsibilities to notify consumers when denying service, requiring a deposit after service has begun, or making service more expensive. 3 federal laws govern adverse action notices:

Equal Credit Opportunity Act (ECOA)Fair Credit Reporting Act (FCRA)Dodd Frank Act

Are local governments subject to these laws?

Yes. These rules apply to all types of credit, not limited to utilities.

Local government utilities are creditors.Water, gas, and other utilities are metered services. The customer pays after accruing their monthly usage.Creditor – “a person who, in the ordinary course of business, regularly participates in a credit decision.” 12 C.F.R. 1002.2Credit – the right granted by a creditor to an applicant to “purchase services and defer payment therefor.” 12 C.F.R. 1002.2

The ECOA notice requirement specifically extends to applications for public utilities credit – “extensions of credit that involve public utility services provided through pipe, wire, or other connected facilities, or radio or similar transmission…if the charges for service, delayed payment, and any discount for prompt payment are filed with or regulated by a government unit.” 12 C.F.R. 202.3(a)(1)

Definitions of adverse action

ECOA Regulation B ECOA FCRA• A refusal to grant credit in

substantially the amount or on substantially the terms requested

• If the creditor makes a counteroffer(to grant credit in a different amount or on other terms) and the applicant rejects the offer

• Termination of account

• Unfavorable change in terms of an account that does not affect all or substantially all of a class of the creditor’s accounts

• Refusal to increase the amount of credit available to applicant

12 C.F.R. §1002.2(c)(1).

• Denial of credit

• Revocation of credit

• Change in terms of an existing credit arrangement

• Refusal to grant credit in substantially the amount or on substantially the terms requested

• Not including refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default, or where such additional credit would exceed a previously established credit limit.

15 U.S.C. §1691(d)(6).

Under the FCRA, “the term ‘adverse action’ has the same meaning as in section 1691(d)(6).” 15 U.S.C. §1681a(k)(1)(A).

Triggering events for adverse action noticeunder the ECOA and FCRA

• Denial of Service• Charging a deposit rejected by potential customer• Termination of Service (except in situations of default or

delinquency)• Charging a deposit to a current customer in order for the

customer to continue receiving service (except in situations of default or delinquency)

Denial of ServiceECOA Reg B language Example

“A refusal to grant credit in substantially the amount or on substantially the terms requested in an application” is adverse action. 12 C.F.R. 1002.2(c)(i).

In Gunter v. Long Island Power Authority/Keyspan, No. 08 CV 498(RRM)(LB), 2012 WL 4057410 at *1 (E.D.N.Y. Aug. 8, 2012), a woman alleged that the power authority refused to open a utility account for her home when her ex-husband had accrued arrears. The court ruled that denial of an application for credit constitutes adverse action and the power authority must provide written notice of denial within 30 days. Id. at *10. For an incomplete application, the utility must also provide a written notice of why the application was incomplete. Id.

Termination of Service (except in cases of delinquency or default)ECOA Reg B language Example

A “termination of an account” is adverse action. 12 C.F.R. 1002.2(c).

In Davis v. Regional Acceptance Corp., 300 F.Supp.2d 377, 382 (E.D. Va. 2002), a customer attempted to purchase a used car from a dealership, but the dealership did not provide her with notice stating why it denied or terminated her credit. Id. at 386. The court held that sufficient allegation of facts indicating denial or termination of credit “constitut[es] an adverse action that would entitle a consumer to notice under the ECOA”. Id. at 387.

Raising Fees for Current Customers and/or Charging a Deposit to a Current Customer in Order to Maintain Service (except in cases of delinquency or default)

ECOA Reg B language Example

An “unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts” is adverse action. 12 C.F.R. 1002.2(c).

In Legge v. Nextel, No. CV 02-8676DSF(VNKX), 2004 WL 5235587 at *3 (C.D. Calif., Jun. 25, 2004) Nextel informed an applicant for wireless services that she would need a co-signer and need to pay an additional deposit in order to continue to receive wireless services, after paying for 6 months of wireless services. Nextel “failed to provide adverse action notices” to the applicant and multiple Nextel customers filed a class action lawsuit for failure to provide adverse action notices. Id.

Charging a Deposit Rejected by Potential Customer • A type of denial of service

ECOA Reg B language Example

An adverse action occurs “unless the creditor makes a counteroffer and the applicant uses or expressly accepts the credit offered.” 12 C.F.R. §1002.2(c).

This means adverse action would occur if the utility offered service on the condition that consumer pay a higher deposit, and consumer rejected it.

Timing and Content of Adverse Action noticesECOA Reg. B 12 C.F.R. §1002.9

ECOA15 U.S.C. §1691

FCRA15 U.S.C. 1681m

Timing Within 30 days after receiving a

completed application, within 30 days

after taking adverse action on an

incomplete application, and within 30

days after taking adverse action on an

existing account.

Within 30 days of receipt of a

completed application for credit.

No timing restrictions

Form In writing In writing. Verbal statements

can be made if the creditor did

not act on more than 150

applications in the preceding

calendar year.

Oral, written, or electronic notice.

Credit score must be disclosed in

written or electronic form.

Contents Statement of actions taken, creditor’s

contact information, and Federal agency

that administers creditor’s compliance.

(FTC). Contains statement of specific

reasons or disclosure of applicant’s right

to a statement of specific reasons within

30 days of request.

Statement of specific reasons for

the adverse action taken, or a

notice that the applicant has

right to a statement of reasons

and the identity of person/office

from which statement can be

obtained.

Notice of the adverse action,

contact information of the

consumer reporting agency, notice

of consumer’s right to obtain

credit report, written or electronic

disclosure of credit report.

Dodd-Frank Act RequirementsAdditionally, when the utility uses a credit score to make an adverse action decision, the adverse action notice must include:

• Numerical credit score used by the creditor in making a credit decision

• Range of possible credit scores• All the key factors that adversely affected the credit score• Date on which credit score was created• Name of person or entity that provided the credit score.

Dodd Frank Act §1100F, 76 Fed. Reg. 41590 (July 15, 2011).

If the utility uses a third party to perform the credit check who provides the utility with a “proprietary score” (such as “red light,” “green light,” or “yellow light”) based on one or more factors in addition to credit information, the proprietary score does not need to be disclosed to the consumer. 76 Fed. Reg. 41605 (July 15, 2011).

Sample Adverse Action Notices – 12 C.F.R. 1002 Appendix C

• Form C-1—Sample Notice of Action Taken and Statement of Reasons• Form C-2—Sample Notice of Action Taken and Statement of Reasons• Form C-3—Sample Notice of Action Taken and Statement of Reasons (Credit

Scoring)• Form C-4—Sample Notice of Action Taken, Statement of Reasons and

Counteroffer• Form C-5—Sample Disclosure of Right To Request Specific Reasons for

Credit Denial

Civil Liability for Creditor Noncompliance

• ECOA 15 U.S.C. §1691e

• Actual damages• Punitive damages not greater than §10,000• Class action damages shall not exceed the lesser of $500,000 or 1% of creditor’s net

worth• If successful action by consumer, creditor liable for court costs and attorney’s fees• The court will consider: amount of actual damages, frequency and persistence of failure

of compliance, resources of creditor, # persons adversely affected, whether creditor noncompliance is intentional

• FCRA 15 U.S.C. §1681n - §1681o• If negligent noncompliance:

• Liable for actual damages, costs, attorney’s fees• If willful noncompliance:

• Liable to consumer for actual damages not less than $100 and not more than $1000• Punitive damages as court may allow, attorney’s fees