Credit Cards, Credit Reports and Fraud: Enforcing Consumer Rights
| Publication year | 1996 |
| Pages | 23 |
1996, April, Pg. 23. Credit Cards, Credit Reports and Fraud: Enforcing Consumer Rights
Credit fraud is rampant and growing exponentially in America. Although the credit industry maintains that credit issuers and merchants are the only victims, fraud has proven unduly detrimental to the consumer whose cards, accounts and personal identifiers have been used by the defrauder. This article provides an overview of credit cards, their usage, liability of cardholders and card bearers, credit fraud, credit reports and related topics.
"Credit" is merely a contract between a consumer ("cardholder") and the credit issuer (bank, credit card company or other lender).(fn1) It results from an offer and acceptance. A "credit card" is an indication to merchants that the person who received the card has a satisfactory credit rating and, if credit is extended by the merchant, the issuer of the card will pay or insure that the merchant receives payment for the merchandise delivered. Further, use of a credit card by the cardholder is an implied, if not actual, representation that the cardholder intends to pay the credit issuer for the charges made.(fn2)
The issuance of credit constitutes an "offer" of credit that may be withdrawn by the issuer at any time, for any lawful reason, before "acceptance" of the offer through the use of the credit card by the cardholder.(fn3)
Credit issuers usually rely on applications to conduct their business. They may receive from a few to thousands of credit applications each day. Courts have consistently held that credit issuers have a duty to exercise reasonable care and diligence in performing a "necessary investigation" of each credit application received before issuing credit.(fn4)
The issuer bears the risk of failing to verify the underlying information on the application, including the applicant's identity and authority.(fn5) Credit issuers are in a superior position to prevent and stop credit fraud, particularly "application fraud," where the cardholder listed on the application never applied for or received the charge card or template.(fn6) A credit issuer may be liable for carelessly sending a credit card through the mail on the authority of an anonymous telephone caller if the issuer failed to use reasonable procedures to verify the identity of the caller.(fn7)
Although courts have not held credit issuers strictly liable for approving applications misrepresenting the cardholder's identity, issuers should exercise reasonable diligence and care to prevent resulting losses.(fn8) Issuers frequently have very few automated procedures to investigate and evaluate applications and tend to place greater emphasis on collection efforts. Some have meager automated procedures in place, but, in this author's experience, employee incentive or laxity results in constant deviation from the guidelines. At least one court has held that an issuer's failure to follow its own proclaimed standards does not, of itself, prove its negligence unless the erroneous information in the application would have placed a reasonably prudent issuer on notice that the application was fraudulent.(fn9)
Although retailers and other merchants often fail to verify the identity of credit card users at the point of sale, courts have held that retailers have a duty to exercise reasonable care to inquire about the identity of a purchaser using a charge card, to examine the card or template and to extend credit only as the card or template authorizes.(fn10)
A cardholder is the person whose personal identifiers are listed on the application made to the credit issuer. The cardholder is not liable for fraud perpetrated through the use of his or her identifiers.(fn11) The Truth-In-Lending Act defines "cardholder" as
any person to whom a credit card is issued or any person who has agreed with the card-issuer to pay obligations arising from the issuance of a credit card to another person.(fn12)
The cardholder is not liable for fraud committed through the misuse of his or her account number or credit card.
Only cardholders are contractually liable for debts incurred by use of the credit card.(fn13) Mere card users, bearers or holders of related cards, even if authorized to use the card, are not liable for such debts.(fn14)
Attempts to argue that a cardholder does not have authority to use the account have been unsuccessful. One court has held that the liability of a company that was the cardholder was not limited based on unauthorized use by an officer to whom the card was issued.(fn16) A cardholder always has actual authority to use his or her own card. This holding blurred the distinction between cardholder and card bearer and may have been more properly decided on a failure by the company to provide adequate notice of potential or real misuse of the account by a formerly authorized bearer.
The blurred distinction also has occurred in cases where the person who received an unsolicited credit card in his name used the card, received billings for charges, and later argued that he was not a cardholder. At least one court found such a person to be a cardholder and imposed liability for charges.(fn17)
The Truth-In-Lending Act protects consumers from fraud or unauthorized use of their credit cards. However, if a court finds that the card bearer had "actual, implied or apparent authority," the Truth-In-Lending Act's limits on liability are inapplicable and the cardholder's contract with the credit issuer and state law govern.(fn18) The defense of unauthorized use may be used where the issuer sues the cardholder in an attempt to collect. In such situations, the issuer has the burden of proving that the particular use was authorized.(fn19)
Generally, when a cardholder, under no compulsion by fraud, duress or otherwise, voluntarily permits another person to use his or her credit card or account, the cardholder has "authorized the use" of that card and account and is liable for resulting charges, even if the cardholder instructed the other person not to charge over a certain limit. The cardholder is liable under agency principles once he or she gives authority to the third person.(fn20) "Misuse" occurs when the card bearer exceeds the authority granted by the cardholder and makes charges not contemplated by the cardholder.(fn21) "Unauthorized use" is use of a credit card by a person who does not have actual, implied or apparent authority for such use and from which the cardholder receives no benefit.(fn22)
Courts are split on whether a cardholder can limit his or her exposure after the fact for charges attributable to a card bearer who was initially authorized but began to misuse the card. One court has responded that the person the cardholder permitted to use the card has "apparent authority" to use the card even after actual authority ends.(fn23)
There is conflicting authority as to whether notice to the issuer that a card bearer has exceeded his or her authority and is in possession of a charge card will terminate responsibility for subsequent charges.(fn24) It is arguable that notice should cut off liability for three reasons: (1) a credit issuer is in a superior position, once notified of potential misuse, to limit losses to the cardholder, itself and third parties such as retailers; (2) under the Truth-In-Lend-ing Act and state laws of agency, agency ends on the cardholder's notice to the bearer that his or her authority has terminated, and once the credit issuer is on notice of such termination, it cannot claim apparent authority exists; and (3) holding the cardholder...
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