CFPB and Third Circuit highlight reporting obligations of furnishers of consumer information

By Monica C. Platt

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.

Consumer Financial Protection Bureau Puts Creditors on Notice of Rulemaking Under the Fair Debt Collection Practices Act

By Edward J. Sholinsky

Last week, the Consumer Financial Protection Bureau issued a news release and Advance Notice of Proposed Rulemaking that signals the Bureau’s intention to broadly exercise its claimed power under the Fair Debt Collection Practices Act to regulate creditors and debt collectors.  Most notably, the Bureau is claiming the power to regulate creditors.  Although creditors generally are exempted from liability under the Act, the 113-page Notice touches on nearly every aspect of debt collection under the Act, seeking comments on a wide variety of topics from traditional written notices to how contemporary communication technology – like social media, text messaging, and cell phones – affect debt collection practices.

Even while acknowledging that Congress specifically excluded creditors from the Act’s reach, the Bureau stated that it “believes it is important to examine whether rules covering the conduct of creditors . . . are warranted,” citing the Dodd-Frank Act as its authority for doing so.  The Bureau’s potential reach here is staggering and could impact creditors, like retailers, medical providers, and small business, which would not likely have considered themselves subject to the Bureau’s jurisdiction or the Act itself. The Bureau signaled earlier this fall that it wished to expand its reach when it claimed supervisory authority over any furnisher of information to credit agencies under the Fair Credit Reporting Act.  We discussed that bulletin in an earlier blog post.  This Notice seems to be the next step in the Bureau’s broad claim to jurisdiction over consumer creditors.

While far ranging, the Notice focuses specific attention on the adequacy of information that creditors provide to collectors and buyers of debts, and how creditors transmit that information.  The questions posed by the Bureau suggest that it is contemplating rules governing how creditors provide information to debt collectors and buyers when assigning or selling a debt and the oversight creditors have over the collection of the sold or assigned debt.  Additionally, the Bureau dedicated a section of the Notice to technology that both creditors and debt collectors and buyers can use to share information, and privacy concerns relating to that technology.

This Notice is the second signal since September that the Bureau is looking to expand its purview in the area of debt collection to creditors, who generally are considered to be outside of the reach of federal debt collection laws.

Seventh Circuit confirms that the FCRA preempts state common law claims

By Stephen J. Shapiro

The Fair Credit Reporting Act (FCRA) imposes responsibilities on those who “furnish information to consumer reporting agencies.” Where entities that furnish information violate those responsibilities, the FCRA provides consumers with legal remedies, but prohibits them from pursuing state law claims relating to the violations. In a recent opinion, the Seventh Circuit reaffirmed that the FCRA preempts all state law claims, both those arising under state statutes, and those arising under state common law.

In Aleshire v. Harris, N.A., the plaintiff borrowed several million dollars from the defendant bank. When the bank reported those loans to consumer credit reporting agencies, it allegedly reported incorrect loan balances, double-reported some of the loans and incorrectly reported that the borrower had exceeded her credit limit. The borrower sued the bank, pleading claims under the FCRA as well as claims under state common law. Holding that they were barred by the FCRA’s preemption provision, the district court dismissed the borrower’s state law claims.

On appeal, the borrower argued that the FCRA only preempts state law claims arising under state statutes, not claims arising under the common law. In support of her argument, the borrower pointed to a section of the FCRA that prohibits consumers from bringing defamation, invasion of privacy and negligence claims against entities that furnish false information to credit reporting agencies unless those entities do so “with malice or willful intent to injure” the consumer. The borrower reasoned that, reading the FCRA’s preemption provision expansively to bar common law claims rather than narrowly to bar only statutory claims would nullify the section that allows consumers to bring defamation, invasion of privacy and negligence claims under certain conditions.

The Seventh Circuit noted that the borrower’s argument “has garnered some sympathy among district courts” in Pennsylvania, Georgia and Texas.  However, relying on its previous holding in Purcell v. Bank of America, in which the Seventh Circuit concluded that these two provisions of the FCRA are not inconsistent because one provision simply preempts more claims than the other, the Court rejected the borrower’s argument and affirmed the dismissal of her state law claims.

The CFPB Offers Guidance to Companies that Furnish Information to Consumer Reporting Agencies

By Edward J. Sholinsky

On September 4, 2013 the Consumer Financial Protection Bureau issued Bulletin 2013-09, which addresses the obligation of “furnishers” under the Fair Credit Reporting Act (FCRA) to investigate disputed information in a consumer’s credit report.

When, under FCRA, a consumer disputes adverse information on his or her credit report, the credit reporting agencies are supposed to forward any documents and information provided by the consumer concerning the dispute to the business that furnished the information.  According to the Bulletin, the Bureau “expects” furnishers to comply with FCRA by:  (1) having a “system reasonably capable of receiving” documents and information from the credit reporting agencies concerning disputes; (2) investigating disputes, which includes reviewing the information provided by the agencies as well as their own information; (3) reporting the outcome of investigations to the agencies; (4) correcting “inaccurate and incomplete” information reported by the agencies; and (5) “[m]odifying” and “deleting,” inaccurate and incomplete information, and “permanently blocking the reporting of the information” that is inaccurate, incomplete or unverified.  The Bulletin warns that furnishers not currently complying with these standards “should take immediate steps to comply with the requirements of the law.”

The Bulletin states that the Bureau will “evaluate compliance” with these requirements by all “furnishers subject to its supervisory and enforcement authorities.”  Notably, the Bulletin contains no description of the furnishers that the Bureau views as being “subject to its supervisory and enforcement authorities.”  This raises the possibility that the Bureau intends the Bulletin to apply not only to businesses generally understood to fall within the Bureau’s supervisory reach — such as large banks — but to any retailer or small business that reports information about a customer to a credit reporting agency.

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