Duty: Reasonable Care:Necessary Investigation: Applications

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David A. Szwak

Duty: Reasonable Care:Necessary Investigation: Applications

Postby David A. Szwak » Mon Oct 17, 2005 8:41 pm

CREDIT ISSUERS:

A. NECESSARY INVESTIGATION BY CREDIT ISSUER:

A credit issuer has a duty to perform a necessary investigation of each credit application it receives, and such investigation of the application must occur prior to the issuance of credit. TransAmerica Insurance Co. v. Standard Oil Co. [Indiana], 325 N.W.2d 210 (N.D. 1982); First National City Bank v. Mullarkey, 385 N.Y.S.2d 473, 87 Misc.2d 1 (N.Y. Cir. Ct. 1976); Humble Oil & Ref. Co. v. Waters, 159 So.2d 408 (La. App. 1963); David Szwak, "Credit Cards in America," John Marshall Journal of Computer & Information Law, John Marshall Law School Law Review, Chicago, Illinois, Vol. XIII, Issue 4, pp.573-584 (Summer, 1995) [see appendix "B"]; David Szwak, "Credit Cards, Credit Reports and Fraud: Enforcing Consumer Rights," The Colorado Lawyer, Colorado Bar Association, Vol.25, No.4, pp.23-28 (April, 1996).

Upon receipt of a credit application, a credit issuer must exercise reasonable care and diligence in performing the necessary investigation of the application and in verifying the underlying information on the application, including the applicant's identity and authority, prior to the issuance of credit. TransAmerica Insurance Co. v. Standard Oil Co. [Indiana], 325 N.W.2d 210 (N.D. 1982); Beard v. Goodyear Tire & Rubber Co., 587 A.2d 195 (D.C. App. 1991).

Credit issuers usually rely upon applications to perpetuate their business. Courts have uniformly held that credit issuers must exercise reasonable care in the investigation of applications received. Beard v. Goodyear Tire & Rubber Co., 587 A.2d 195 (D.C. App. 1991); TransAmerica Ins. Co. v. Standard Oil Co., 325 N.W.2d 210 (N.D. 1982); First Nat. Bank v. Mullarkey, 385 N.Y.S.2d 473, 87 Misc.2d 1 (N.Y. Cir. Ct. 1976); Humble Oil & Ref. Co. v. Waters, 159 So.2d 408 (La. App. 1963); Weistart, "Consumer Protection in the Credit Card Industry: Federal Legislative Controls," 70 Mich.L.Rev. 1475, 1509-10 (1972). A credit issuer must exercise reasonable care and diligence in the investigation of credit applications received. Beard v. Goodyear Tire & Rubber Co., 587 A.2d 195 (D.C. App. 1991).

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. American Airlines, Inc. v. Remis Industries, Inc., 494 F.2d 196, 201 (2d Cir. 1974); First Nat. Bank of Mobile v. Roddenberry, 701 F.2d 927 (11th Cir. 1983); Humble Oil & Ref. Co. v. Waters, 159 So.2d 408 (La. App. 1963); Walker Bank & Trust Co. v. Jones, 672 P.2d 73, 76 (Utah 1983), (dissent); Weistart, "Consumer Protection in the Credit Card Industry: Federal Legislative Controls," 70 Mich.L.Rev. 1475, 1509-10 (1972); Bill Effinger, "Making Crime Pay: How Identity Thieves Cash in on Your Credit," New Hope Press, La Jolla, California (1995).

"...[I]ssuers are in a better position to control the occurrence of these losses (credit fraud). They not only select the merchants who may accept the card and the holders who may use it, but also design the security systems for card distributions, user identification, and loss notification. Hence, the statutory choice of issuer liability assures that the problem of credit card loss is the responsibility of the party most likely to take efficient steps in its resolution. (parenthetical explanation added) (citations omitted)." Weistart, "Consumer Protection in the Credit Card Industry: Federal Legislative Controls," 70 Mich.L.Rev. 1475, 1509-10 (1972).

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