March 11, 2014
Consumer credit reporting is coming under increased scrutiny, and furnishers should take care to review their reporting policies. In remarks at the Consumer Advisory Board meeting last month, CFPB Director Richard Cordray announced an increased effort by the CFPB to exercise its authority over large credit reporting companies and “many of their largest furnishers.” Director Cordray pointed to a CFPB report showing that more than 1 in 10 of the complaints submitted to the Bureau since its inception have been related to credit reporting, and 75 percent of these have been regarding incomplete or inaccurate credit reports. Also in February, the Third Circuit issued a decision clarifying that the Higher Education Act of 1965 (HEA) does not exempt a university from compliance with the Fair Credit Reporting Act (FCRA) when it furnishes information related to a consumer’s federal student loans.
In the Third Circuit case, plaintiff alleged that a university negligently and willfully violated FCRA with respect to reporting on a Perkins loan. The plaintiff defaulted on the loan in 1992, but paid the balance in 2011. Subsequently, a negative trade line appeared on his credit report because the university reported the previous delinquency to a consumer reporting agency (CRA), but did not report the date of first delinquency or that the account had ever been placed for collection. When the plaintiff submitted a formal dispute to the CRA, it notified the university, which investigated the dispute through an outside servicer, and then resubmitted substantially the same information to the CRA. After the plaintiff filed a second dispute, the university modified some parts of the report, but still did not report the loan’s history, the date of first delinquency, or the existence of a dispute.
FCRA was enacted to protect consumers from the transmission of inaccurate credit information. Under the Act, CRAs are prohibited from reporting accounts that have been placed for collection or charged to profit and loss more than seven years prior to the report, after which time such events are considered to have “aged off” the credit report. Furnishers providing information related to such an account must notify a CRA of the date the account first became delinquent so that the CRA can calculate when the delinquency ages off.
Under HEA, CRAs are to ignore the aging off provisions when reporting on certain federally backed loans until the loan is paid in full. The university argued that HEA therefore requires universities to omit the date of first delinquency and the collection history when reporting on Perkins loans so that a CRA does not mistakenly allow a loan to age off of the credit report. The court disagreed, finding that universities must provide complete information to a CRA and leave the CRA’s compliance with HEA up to the CRA. The Third Circuit also found that HEA does not indefinitely exempt a loan from aging off because HEA clearly states that once a loan is paid off, it should age off.
In his remarks, Director Cordray stressed the need for furnishers to thoroughly investigate disputes and correct inaccurate information where it exists, chiding furnishers for not fully investigating disputes. In this vein, The Third Circuit found that a furnisher’s post-dispute investigation into a consumer’s complaint must be reasonable under the circumstances, and the factfinder must balance the potential harm from inaccuracy against the burden of safeguarding against inaccuracy. The court noted that even correct information might be inaccurate if there are omissions that create a materially misleading impression.
Lastly, the Third Circuit recognized that a plaintiff has a cause of action if a furnisher fails to note the dispute in later reporting. While private enforcement of the furnisher’s obligations to report a dispute is not available, the continuing failure to report a potentially meritorious dispute violates the requirements for accurate post-dispute reporting of debts, and is privately enforceable.
The Third Circuit’s decision and the CFPB’s recent report highlight the need for all furnishers, including universities, to be aware of the interaction between all applicable laws and the effect on their own reporting obligations. Universities providing federally backed loans as part of their financial aid packages (likely most universities) should review their reporting policies and practices and assess the dispute-resolution procedures of outside contractors to ensure compliance on all levels. Furnishers should also err on the side of providing more information, not less, to a CRA to enable the CRA to comply with its duties. If a university wants to flag for a CRA that a loan is subject to HEA, it may do so, but it should not screen information that it thinks the CRA does not need or cannot report.