This article will review recent important rulings in Fair Credit Reporting ("FCRA") Act cases. Specifically, the cases relate to (1) the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") amendments to the FCRA, (2) permissible purposes for obtaining a consumer credit report, and (3) investigations related to the accuracy of tradelines.
I. THE FCRA AND THE CARES ACT
Perhaps the most important and notable development in FCRA standards in recent years is the passing of the CARES Act, on March 27, 2020. The CARES Act was Congress' attempt to right the economic ship during the initial stages of the COVID-19 pandemic, and it amended the FCRA to assist consumers struggling to make monthly payments or obtain credit. At the same time, employment in many "non-essential" positions was prohibited due to health and safety concerns. Since the CARES Act passed, Courts have begun interpreting these amendments to provide clarity for consumers, furnishers, and credit reporting agencies.
A. Horvath v. JPMorgan Chase &
in the United States District Court for the Southern District of California1
The Plaintiff filed a petition in San Diego County Small Claims Court, alleging Chase violated the FCRA and the CARES Act. Chase removed the case to the Southern District of California and filed a Motion to Dismiss. The Plaintiff claimed Chase's reports of delinquent payments to the credit reporting agencies were inaccurate or misleading because the account was subject to COVID deferral.
The Court held that Plaintiff does not have a cause of action under the CARES act because there is no private cause of action to enforce its provisions. Additionally, the Plaintiff failed to plead that she notified the credit reporting agencies that she disputed the reporting as inaccurate. The Court held that an allegation of tradeline inaccuracy stemming from a CARES Act deferral does not absolve a plaintiff from first having to dispute the tradeline with the credit reporting agency. Because the complaint failed to allege that a dispute letter was provided to the credit reporting agencies, the Motion to Dismiss was granted,with leave to amend.
B. Hafez v. Equifax Information Services,
in the United States District Court for the District of New Jersey2
The Plaintiff brought this putative class action alleging Defendants failed to adopt reasonable procedures to insure the accuracy of consumer credit reports in light of the CARES Act amendments to the FCRA. The Plaintiff's student loan payments were suspended by the the CARES Act, and her loan servicer reported her loans as in "forbearance" rather than "current." Her credit score fell by 97 points during this time. Plaintiff notified her servicer, and the servicer removed the "forbearance" remark and notified the credit reporting agencies. Plaintiff alleges that, despite the Secretary of Education's requirement to ensure that suspended payments were treated as if the borrower made a regularly scheduled payment for credit reporting purposes, VantageScore Solutions provided a score that did not account for the CARES Act amendments and treated the suspension of student loan payments as an adverse credit event. Importantly, the Plaintiff did not state whether her federal student loans were current prior to the CARES Act or whether she received an accommodation under the CARES Act.
The defendants filed a motion to dismiss. The Court held that it is not patently inaccurate to report federal student loans as anything other than current. Said another way, the credit reporting agencies do not need to report an account as "current" if the account was delinquent before an accommodation under the FCRA (as amended by the CARES Act).
C. Mitchell v. Specialized Loan Servicing,
in the United States District Court for the Central District of California3
In this case, the Plaintiff took out a second mortgage on his home in 2019. He sought three months of loan forbearance under the CARES Act. Interacting with a voice response system, the Plaintiff indicated he sought forbearance because of the economic impacts of COVID-19 and selected an option that indicated he lost income or work hours. The defendant approved the forbearance, and the Plaintiff was not required to make payments for three months. The defendant specified that delinquent payments would not be reported to credit bureaus as long as payments were made according to the forbearance plan. Near the end of the forbearance period, the Plaintiff requested and received an additional three months of forbearance. During this time, the defendant reported to the credit bureaus that there was no date of first delinquency, that there were zero past-due payments, that the account was affected by a natural or declared disaster, and a payment history code of "D" for each month of the forbearance, which indicates the absence of data or payment history during the forbearance. Shortly after being in forbearance, the Plaintiff sought to finance the purchase of a a new car but was denied financing because of the payment history code on his credit report.
Defendant filed a a summary judgment motion, arguing its credit reporting was correct. The Court granted the Motion for Summary Judgment. It held that the loan servicer met its statutory obligation to report the loan as "current" when it did so in the payment status field. The Court expanded upon this, saying the use of the "D" code in the payment history section was not prohibited by the FCRA.
II. PERMISSIBLE PURPOSES FOR OBTAINING A CONSUMER REPORT
The FCRA establishes the rules for when a person may obtain an individual's consumer report and provides a cause of action for consumers whose consumer reports are obtained without a permissible purpose. Since the turn of the century, this section of the FCRA has been amended at least eight times. While the waters may be muddy concerning when a permissible purpose exists to obtain a consumer report, the following cases shed some light on how a court will analyze the issue at various stages of litigation.
A. Shockley v. Clarity Services,
in the United States District Court for the Western District of Wisconsin4
The Defendant assembles and sells consumer credit information to short term lenders. The plaintiffs are Wisconsin residents that approached short term lenders for extensions of credit and the lenders obtained a consumer report from the defendant. In some instances, the plaintiffs alleged they never sought credit from these lenders. The plaintiffs allege Clarity violated the FCRA by furnishing credit reports based solely on the lender's promise that it had a permissible purpose for obtaining the information without obtaining written consent from the plaintiffs. Clarity's agreements with each lender state that the lender would request and use consumer reports only for lawful purposes.
Clarity filed a Motion to Dismiss, which was granted. The court held that the defendant was entitled to rely on the representations made by the lenders that they would only use consumer reports for permissible purposes. The court also asserted that a lender's actual purpose for obtaining a consumer report is irrelevant to the defendant's liability. Third, the court held that a consumer does not need to consent before a party obtains a consumer's report if the agency has a reason to believe that the recipient has a permissible purpose.
B. Persinger v. Southwest Credit Systems,
in the United States Court of Appeals for the Seventh Circuit5
The plaintiffs obtained a bankruptcy discharge order for the debt serviced by the defendant. The defendant closed its account for plaintiffs. Months later, defendant received a delinquent account in a plaintiff's former name (perhaps a maiden name) for a debt that was not listed on the plaintiffs' bankruptcy schedules. The defendant performed a LexisNexis search for bankruptcy information related to the account, and the search did not yield a positive hit. So the defendant began to form a collection strategy, which involved ordering a "propensity-to-pay" score from a consumer credit reporting agency. Several months later, LexisNexis updated the plaintiffs' information such that the new debt was shown to be discharged. It provided this information to the defendant, who promptly closed the account. The plaintiffs learned that the defendant obtained her credit information and filed a putative class-action alleging defendant lacked a permissible purpose.
In affirming the granting of defendant's Motion for Summary Judgment, the 7th Circuit held that although the defendant did not have a permissible purpose for obtaining the report because the account was discharged in bankruptcy, the noncompliance was not willful because Plaintiff failed to list the debt on its bankruptcy schedules. Therefore, Southwest Credit Systems had a reasonable basis for relying on its procedures. This fact, along with the fact that the defendant closed the account immediately upon learning of the discharge, led the Court of Appeals to hold the granting of the Motion for Summary Judgment was proper.
C. Breneisen v. Countryside Chevrolet/Buick, GMC,
in the United States District Court for the Eastern District of Wisconsin6
The plaintiffs visited the defendant's dealership and informed the salesperson that they were interested in purchasing a car in cash. They specifically instructed the salesperson not to conduct a credit check because they would be paying in cash. After a test drive and an agreement on price, the salesperson asked for the plaintiffs' social security numbers, which the plaintiffs reluctantly provided. The plaintiffs indicated they would return with a cashier's check for the price of the vehicle. After being informed of an additional fee associated with cashier checks, the plaintiffs decided not to purchase the car. The plaintiffs eventually received a letter stating the dealership accessed their Experian and TransUnion credit reports because the plaintiffs had "inquired about doing business with Countryside Auto Group." When the plaintiffs contacted the dealership, they were told this was "standard procedure." In their complaint, the plaintiffs claim the defendant misrepresented to Experian and TransUnion that the plaintiffs were applying for financing.
The Court denied the defendant's Motion to Dismiss. The defendant argued that it had a permissible purpose when the plaintiffs offered to pay with a cashier's check, citing a 1998 FTC Advisory Opinion Letter that addressed this scenario. The Court noted, however, that the plaintiffs initially told the salesperson they would pay in cash. Because the court must make all reasonable inferences in favor of the plaintiffs when analyzing whether to dismiss a complaint under Rule 12(b)(6), the court held that the plaintiffs' allegations that they would pay in cash and that the defendant lacked a permissible purpose to obtain the consumer report were sufficient to state a claim upon which relief could be granted. The court denied the Motion to Dismiss.
III. INVESTIGATIONS AND ACCURACY OF TRADELINES PURSUANT TO 15 U.S.C. § 1681S-2(B)
Section 1681s-2(b) has resulted in significant litigation over the last several years. As courts meticulously try and determine which investigations are reasonable and how furnishers should report different fact patterns, the following cases should be useful in navigating this area.
A. Bibbs v. TransUnion, LLC
in the United States Court of Appeals for the Third Circuit7
In Bibbs, the Third Circuit consolidated three cases and affirmed the district courts' orders granting TransUnion's Motion for Judgment on the pleadings. Each Plaintiff borrowed student loans and eventually defaulted on the loan obligations by failing to make monthly payments. Each student loan servicer transferred the borrowers' accounts and began reporting the accounts to the credit reporting agencies with a zero balance, noting that the payment obligations transferred. They also indicated that the "Pay Status" field showed "120 Days Past Due" but also noted a $0 balance. It was undisputed that each borrower failed to make timely payments and that the accounts were correctly reported as delinquent until they were closed and transferred. It was also undisputed that each borrower owed no balance to the creditors that transferred the accounts after the accounts were transferred. Each borrower argued that reporting a "Pay Status" of "120 Days Past Due" and a balance due of $0 was inaccurate and can mislead prospective creditors into incorrectly assuming each borrower was currently more than 120 days late on loans that have been closed. Each borrower sent a dispute letter to TransUnion, arguing that it is impossible to be late on an account with a $0 balance, and requested removal of the tradeline. TransUnion timely investigated the accounts and sent each borrower a letter stating each credit report was accurate and was not updated following the investigation.
To determine whether the tradelines were inaccurate or misleading under the FCRA, the court adopted the "reasonable reader" standard, where courts view a credit report from the perspective of a typical, reasonable reader viewing the tradeline in its entirety, not by reading a portion of the credit report in isolation. In applying this reasonable reader standard, the court analyzed whether the "Pay Status" field showing "120 Days Past Due" was inaccurate or misleading given the "maximum possible accuracy" standard that the FCRA applies to the credit reporting agencies. The court held that a reasonable reader viewing each borrower's credit report would see the multiple conspicuous statements noting that the accounts were closed and conclude no amounts were due to the creditors that transferred the accounts. The Court affirmed the judgment on the pleadings and held the credit reports were accurate.
B. Otto v. TransUnion, LLC
in the United States District Court for the District of Oregon8
The Plaintiff obtained a bankruptcy discharge as to his account with a defendant. When he obtained his credit report, which he believed contained multiple charge-off notifications (including two months reporting a charge-off after the discharge), the Plaintiff requested that the post-discharge reporting be removed. Upon disputing the information with a defendant credit reporting agency, and upon a reinvestigation by the defendant furnisher, the tradeline was not updated, and the Plaintiff filed suit against both entities.
The furnisher defendant filed a motion to dismiss. The court noted that a "charge-off" was when a creditor changed the debt from a receivable to a loss for accounting purposes. The court viewed the credit report and noted that the alleged multiple charge-offs were simply a recurring report of one charge-off, specifically permitted by the FCRA under § 1681c(a)(4). Because reporting a delinquent account as charged off is not inaccurate within the meaning of the FCRA, the court granted the furnisher's motion as to the claim, alleging inaccuracy based on multiple charge-offs. However, Plaintiff adequately pled an FCRA claim based on the furnisher's reporting that the debt was charged off for two months following the bankruptcy discharge because this information can plausibly be inaccurate or misleading.
C. Hussey v. Equifax Information Services,
in the United States District Court for the Western District of Tennessee9
The Plaintiff alleged his student loan servicer furnished an inaccurate tradeline to the credit reporting agencies when it included a notation indicating an account was in dispute. The Plaintiff then sent a letter to the defendant credit reporting agencies indicating he no longer disputed the account. The defendant credit reporting agencies then forwarded the dispute letter to the defendant loan servicer, but the "account in dispute" notation was not removed. The Plaintiff claimed this notation prevented him from obtaining mortgage refinancing.
The loan servicer defendant filed a motion for judgment on the pleadings. The court noted that district courts seemed to be split on the issue, but held that where a consumer sends a letter to a credit reporting agency requesting the removal of the dispute notation but never terminates a dispute directly with the furnisher, a furnisher cannot be liable, as a matter of law, under § 1681s-2(b). The court granted the furnisher's motion for judgment on the pleadings.
D. Gross v. CitiMortgage, Inc.
In the United States Court of Appeals for the Ninth Circuit10
The plaintiff obtained two loans to finance the purchase of a home. The lienholder for the senior lien eventually conducted a foreclosure sale which "abolished" the junior lien. Several years later, the plaintiff attempted to get approved for a mortgage loan, but the junior lienholder was reporting the junior lien as past due with accruing interest and late fees despite the fact that Arizona law prohibits lienholders from pursuing deficiency judgment for deficiencies after the foreclosure of mortgage liens. The borrower sent two dispute letters - one in February 2018 and one in May 2018. In response to the February 2018 dispute letter, the junior lienholder only changed the information from 120 days past due to 180 days past due. In response to the May 2018 dispute letter, the junior lienholder reported the debt as charged off as of April and May 2018. The borrower filed suit and alleged the junior lienholder failed to conduct a reasonable investigation to determine that no amount was owed after the foreclosure sale of the property several years prior.
The district court granted the junior lienholder's motion for summary judgment. On appeal, the Court of Appeals overturned the summary judgment order. The Ninth Circuit held that the borrower was only required to make a prima facie showing of inaccurate reporting, but he established inaccuracy as a matter of law based on Arizona's antideficiency statute. The court then turned to the reasonableness of the junior lienholder's investigation. The Court held that the "FCRA will require furnishers to investigate, and even to highlight or resolve questions of legal significance." Despite the fact that a vice president of the junior lienholder testified about the company's processes for handling credit reporting investigations, the court held that genuine issues of material fact existed regarding the reasonableness of the junior lienholder's investigation of the debt. Additionally, because FCRA plaintiffs can recover damages based on emotional distress and humiliation, and to what extent other tradelines were the cause of the plaintiff's damages, the court held that damages and causation questions should also be decided by a finder of fact.
1. Horvath v. JP Morgan Chase & Co., No. 3:21-cv-1665-BTM-AGS, 2022 U.S. Dist. LEXIS 3976 (S.D. Cal. 2022)
2. Hafez v. Equifax Info. Servs., LLC, Civil Action No. 20-9019 (SDW) (LDW), 2021 U.S. Dist. LEXIS 78260 (D.N.J. 2021)
3. Mitchell v. Specialized Loan Servicing LLC, No. 2:20-cv-10455-SB-PD, 2021 U.S. Dist. LEXIS 246880 (C.D. Cal. 2021)
4. Shockley v. Clarity Servs., Inc., No. 21-cv-434-jdp, 2022 U.S. Dist. LEXIS 117524 (W.D. Wis. 2022)
5. Persinger v. Sw. Credit Sys., L.P., 20 F.4th 1184, 1188 (7th Cir. 2021)
6. Breneisen v. Countryside Chevrolet/Buick/Gmc, Inc., 573 F. Supp. 3d 1328-29 (E.D. Wis. 2021)
7. Bibbs v. Trans Union LLC, Nos. 21-1350, 21-1527, 21-1530, 2022 U.S. App. LEXIS 21819 (3d Cir. 2022)
8. Otto v. TransUnion, LLC, No. 6:21-cv-00379-AA, 2022 U.S. Dist. LEXIS 46314 (D. Or. 2022)
9. Hussey v. Equifax Info. Servs., LLC, No. 2:20-cv-2791-JPM-ATC, 2022 U.S. Dist. LEXIS 49548 (W.D. Tenn. 2022)
10. Gross v. CitiMortgage, Inc., 33 F.4th 1246, 1249 (9th Cir. 2022)
Originally published in the Texas Bar CLE's 18th Annual Course on Advanced Consumer & Commercial Law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.