This month’s post will be a follow-up to my post on January 9, regarding when a debt collector must tell a consumer reporting agency (CRA) that a consumer has disputed a debt. In that post, I discussed cases which say that if a debt collector knows that a debt is disputed, and subsequently reports the debt to a CRA, then the collector must tell the CRA about the dispute; but that if the debt collector reports first, and learns about the dispute afterward, it need not tell the CRA about the dispute.
I then suggested that the rule might be as follows:
[I]f a debt collector tries to collect a debt in Year 1; reports the debt to the CRAs in Year 2, and only afterward receives notice of the dispute in Year 3, then the collector need not report the dispute to the CRAs. [But], if the debt collector later updates its reporting in Year 4, then its update must mention that the debt was disputed in Year 3.
Questions about that statement have caused me to look into whether my suggestion had any direct support in case law. It turns out that my suggestion may not actually be the law. Here’s the story:
A. Nearly every case that discusses this issue involves facts which are a little bit different than the one in my hypothetical. For example, the cases that I cited in my initial post, Rogers and Wilhelm, both involved situations where a debt collector reported a debt to a CRA on date 1; received notice of a dispute on date 2; and never updated the report after that. So those cases don’t answer the question of whether a debt collector who reports a debt; receives a dispute; and then updates its report, must mention the dispute in the update.
B. Both Wilhelm and the FTC commentary on which it relied contain statements that could be taken in support of either position. They say that:
1. Disputed debt. If a debt collector knows that a debt is disputed by the consumer . . . and reports it to a credit bureau, he must report it as disputed.
2. Post-report dispute. When a debt collector learns of a dispute after reporting the debt to a credit bureau, the dispute need not also be reported.
The first of these two statements suggests that if a debt collector reports a debt, learns of a dispute, and updates the report, it must mention the dispute in the update. But the second of these two statements does not.
C. There is very little case law on the precise question at issue here. I found two cases, and they give conflicting answers. In O’Fay v. Sessoms & Rogers, P.A., No. 5:08-CV-615-D, 2010 U.S. Dist. LEXIS 104307 (E.D.N.C Feb. 9, 2010), a debt collector reported a debt to the CRAs in 2007 or earlier; the plaintiff disputed the debt with the collector in February 2008; the debt collector updated the report in March 2008 and May 2008 but did not note the dispute; and then the debt collector updated it a third time in July 2008 and did note the dispute. Plaintiff filed suit six months later, in December 2008, and the court found that the March and May updates were violations of the FDCPA (i.e., the debt collector was required to mention the dispute whenever it updated its report after receiving the dispute). But in Hinds v. AR Resources, Inc., No. 12-2567, 2013 U.S. Dist. LEXIS 61200 (D. Minn. Apr. 30, 2013), a debt collector reported a debt to the CRAs before April 2012; the plaintiff disputed the debt with the CRAs in April 2012; the debt collector updated the report in July 2012 and did not note the dispute; and the plaintiff filed suit in October 2012. The court held that the plaintiff did not plead facts to indicate that the debt collector had notice of the July 2012 dispute and dismissed the plaintiff’s claim.
D. The courts that have addressed the broader question of whether a debt collector must update its report to the CRAs after receiving notice of a consumer’s dispute, have all suggested that there is no “continuing duty” to do this, and that any failure to update or related mistake would be subject to the FDCPA’s one year statute of limitations. In Rogers, the district court refused “to interpret [15 U.S.C.] Section 1692e(8) as imposing a continuing duty on debt collectors to advise consumer reporting agencies that a debt has been disputed.” And in Wilhelm, the Tenth Circuit stated that in the absence of any evidence that the debt collector “communicated any credit information about [plaintiff] to any person within the one-year limitations period,” a claim based on updates made prior to that period “is clearly time barred.”
In summary, there is some authority for the proposition whenever a debt collector gets notice of a consumer’s dispute, the FDCPA requires it to make sure that any updates to the CRAs mention that dispute. However, there is some authority that goes the other way, and there is also some authority that any mistake only subjects the debt collector to liability if the consumer files suit within a year of an update that fails to mention the consumer’s dispute.
The ECOA is a federal law,15 U.S.C. § 1601 et seq., that prevents banks and other creditors from discriminating against people for pretty much the same reasons that employers are prohibited from discriminating against employees. The ECOA provides that “It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction— on the basis of race, color, religion, national origin, sex or marital status, or age ….” 15 U.S.C. § 1601(a)(1).
Regulation B permits federal agencies to make rules related to ECOA. The Federal Reserve Board initially made such rules, pursuant to 12 CFR 202.1 et seq. Since 2012, the new Consumer Financial Protection Bureau (CFPB) has made such rules, pursuant to 12 CFR 1002.1 et seq. A creditor that fails to comply with these rules can face examination and enforcement from its primary regulator (e.g., FDIC, FRB, NCUA, OCC, CFPB, etc.).
Historically, a great deal of private litigation related to ECOA has been about allegations that a creditor discriminated against women due to their marital status (e.g., by preventing married women from obtaining credit on their own without having their husbands act as co-signers). More recently, private litigation has asked whether women who agree to co-sign their husbands’ applications for credit can avoid paying those loans due to an alleged ECOA violation. The Supreme Court will be hearing argument on this issue this fall, in Hawkins v. Community Bank of Raymore (cert. granted March 2, 2015). The Court will be resolving a disagreement, or split, between the Sixth and Eighth Circuit Courts of Appeals on this issue. The question is whether women who co-sign their husbands’ applications for credit (and, by doing so, become personal guarantors on the loan) are “applicants” and therefore protected by ECOA.
The Eighth Circuit addressed this question in Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937 (8th Cir. 2014), which is the case that will be heard by the Supreme Court on appeal. This case arose out of loans that banks made to corporations run by married men. The banks required the men to personally guarantee the loans (i.e., if the corporations defaulted, the bank could sue the owners for the debt). To prevent the men from giving all of their property to their wives (which would mean that there was nothing for the bank to collect), the banks also required the mens’ wives to co-sign these loan guarantees.
The corporations defaulted; the banks sued the owners and their wives for the debt; and the wives raised ECOA as an affirmative defense (i.e., they argued that by making them co-sign on their husbands’ corporate loans, and then suing them, the banks were discriminating against them, which is prohibited under ECOA, such that the wives’ guarantees should be void and the suits dismissed). The trial court granted summary judgment to the bank, and the Eighth Circuit affirmed. The reason was this: ECOA prohibits discrimination against credit “applicants,” 15 U.S.C. § 1691(a), and the agencies have defined “applicants” to include guarantors. See 12 CFR 202.2(e); 12 CFR 1002.2(e). The Eighth Circuit rejected that definition: “A guarantor engages in different conduct, receives different benefits, and exposes herself to different legal consequences than does a credit applicant.” 761 F.3d at 942. This meant that the guarantor-wives were not “applicants” and that they were therefore unprotected by ECOA (and unable to raise it as a defense).
The Sixth Circuit reached a different result in BB Acquisition, LLC v. Bridgemill Commons Dev. Group, LLC, 754 F.3d 380 (6th Cir. 2014). This case involved another real estate loan guarantee executed by the wife of a real estate developer, and her attempt to raise ECOA as a defense to the bank’s collection of the debt she helped guarantee. The trial court found for the bank on this issue, but the Sixth Circuit reversed. It held that the agency definition of “applicant” to include guarantors deserved deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Specifically, the Sixth Circuit found that: i) the text of ECOA was ambiguous on whether a guarantor was an “applicant” who was protected by the statute; and ii) the agency’s decision to include guarantors as protected applicants was reasonable. The Sixth Circuit recognized that this decision had the potential to cause creditors to lose a significant sum, but stated that “We will not strike down a valid regulation to salvage bad underwriting.” 754 F.3d at 386.
The same issue also came up in RL REGI N.C., LLC v. Lighthouse Cove, LLC, 762 S.E.2d 188 (N.C. 2014). Regions Bank lent roughly $4.2 million to real estate developers who defaulted. The loans were guaranteed by the developers and their wives, whom the bank sued. One of the wives asserted, as an affirmative defense, that her guarantee had been obtained in violation of ECOA. The bank’s position was that it asked each spouse to sign, and he or she did sign, a waiver of all defenses including any ECOA defense. This raised the question of whether a person could waive her ECOA rights. A jury found for the wife at trial; the trial court entered judgment for her; and the intermediate appellate court affirmed; but the North Carolina Supreme Court reversed. “There is nothing facially illegal about this loan relationship in which a lender provided a loan upon certain conditions; moreover, parties routinely forego claims in settlement agreements.” 762 S.E.2d at 191.
So, interesting question. It will be interesting to see which position the Supreme Court takes.
The Central District of California just decided a case which presents an interesting question (to me, anyway): can a debt collector, in an effort to convince people to pay something toward an unpaid debt, offer to cut the following deal: pay me x% of the debt, and I will consider the debt to be paid in full, and I will tell the credit bureaus that it was paid in full.
The question is interesting because, in my experience, this sort of thing happens all the time. Debt collectors routinely settle debts for partial payment: if A owes B $1000, but A doesn’t have that much money, B’s debt collector may let A settle the debt for $500, or $750, or some other figure that A can afford to pay.
The catch is that if A pays $500 to settle a $1000 debt, then technically, the debt was not paid in full. This raises the question of whether the debt collector must tell the credit bureaus that the debt was not paid in full. After all, the FCRA prohibits debt collectors (and everyone else) from providing the credit bureaus with inaccurate information. 15 USCS § 1681s-2(a)(1)(A).
So the question is this: if a debt collector agrees to settle a $1000 debt for $500, is the debt paid in full (because the debt collector agreed to consider it paid), or not (because the debt was settled for something less than the total)?
In Kielty v. Midland Credit Mgmt., No. 3:14-cv-00541, 2015 U.S. Dist. LEXIS 9918 (C.D. Cal. Jan. 28, 2015), the district court found that a debt collector may report a partially-paid debt as “paid in full,” in an effort to get consumers to pay something toward unpaid debts. In Kielty, a debt collector sent letters and brochures which told consumers that if they contacted the debt collector and agreed to make a sufficiently-partial payment on an unpaid debt, the debt collector would cut a deal, consider the debt paid in full, and tell the bureaus that it was paid in full.
The plaintiffs in Kielty argued that the debt collector’s offer to do this violated the FDCPA and the FCRA, because reporting that a partially-paid debt was paid in full would be an inaccurate statement and thus a violation of both statutes. The court disagreed: the court did not find any legal authority which “bars [a debt collector] from reporting debts it settled with consumers as ‘Paid in Full,'” so the court held that “the Complaint fails to make a plausible allegation that [the debt collector’s] representations that Plaintiffs’ accounts will be considered “Paid in Full” and reported as such to the three major credit reporting agencies violates the FDCPA.” 2015 U.S. Dist. LEXIS 9918, at **16-18.
This decision supports the current industry practice of cutting deals with debtors to settle unpaid debts for partial payment. This practice of reporting a partially-paid debt as “paid in full” improves a consumer’s credit history and gives consumers an additional reason to make a partial payment toward a debt. As such, the decision benefits consumers (who now have a permissible way to work on cleaning up their credit reports by cutting deals) and debt collectors (who can make deals that obtain some money on an unpaid debt, which is presumably better for them than no money).
This blog is supposed to be about both the FCRA and also “consumer finance law generally.” This month’s post is about “consumer finance law generally,” specifically about an issue where the FCRA interacts with the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. Sec. 1692 et seq.
The FDCPA provides that a debt collector may not “communicat[e] . . . to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.” 15 U.S.C. § 1692e(8) (emphasis added).
This provision, as written, begs the question: when does failing to communicate that a disputed debt is disputed make a debt collector’s communication “false,” such that the debt collector has violated the FDCPA? Always, or just sometimes?
Case law suggests that the answer is “sometimes.” Two scenarios should help illustrate how this works.
First, if a debt collector tries to collect a debt in Year 1; receives notice from the consumer in Year 2 that the debt is disputed; and then reports the debt to the credit bureaus in Year 3, then the debt collector must tell the bureaus, as part of the Year 3 report, that the debt was disputed in Year 2.
But second, if a debt collector tries to collect a debt in Year 1; reports the debt to the CRAs in Year 2, and only afterward receives notice of the dispute in Year 3, then the collector need not report the dispute to the CRAs.
Under this second scenario, if the debt collector later updates its reporting in Year 4, then its update must mention that the debt was disputed in Year 3. But if the debt collector never updates its reporting – so the only information the bureaus have is the debt collector’s report back in Year 2 – then the debt collector is not required to notify the bureaus of the dispute.
One court framed the issue this way: does the FDCPA “impos[e] a continuing duty on debt collectors to advise consumer reporting agencies that a debt has been disputed, even when the dispute occurs after the debt collector reports the debt and the debt collector has not reported the debt since the dispute?” Rogers v. Virtuoso Sourcing Group, LLC, No. 1:12-cv-01511-JMS-DML, 2013 U.S. Dist. LEXIS 27409, at **8-9 (S.D. Ind. Feb. 28, 2013).
The Rogers court answered that question in the negative, and other courts have done likewise. See Rogers, 2013 U.S. Dist. LEXIS 27409, at *7 (collecting authorities for the proposition that “[w]hen a debt collector learns of a dispute after reporting the debt to a credit bureau, the dispute need not also be reported,” and following Wilhelm v. Credico, Inc., 519 F.3d 416, 418 (8th Cir. 2008)); see also Phillips v. NCO Fin. Sys., No. 12-cv-15482, 2014 U.S. Dist. LEXIS 50089, at **20-21 (E.D. Mich. Apr. 11, 2014) (following Wilhelm); Donatelli v. Warmbrodt, No. 08-1111, 2011 U.S. Dist. LEXIS 69207, *27-28 (W.D. Pa. June 28, 2011) (same).
Class action lawyers tend to copy one another. If one lawyer thinks up a great class action suit, alleging that Company A violated Law X, then before long lots of other lawyers will sue Companies B, C, D, and E, all likewise alleging that they too violated Law X.
That appears to be happening right now in the FCRA ecosystem.
First, this blog noted some two years ago that Domino’s apparently violated 15 U.S.C. Sec. 1681b(b)(2)(A)(i), which states that before an employer conducts a background check, the would-be employee must be given a disclosure form which notifies them “in a document that consists solely of the disclosure,” that the employer may or will be running a background check. Domino’s apparently included a release of liability in its disclosure form, which meant that the form did not “consist solely of the disclosure.”
Now, lawyers are suing lots of other companies, alleging that all of them did what Domino’s allegedly did: namely, put a release of liability in their criminal background disclosure form. Whole Foods was apparently sued by someone in California in March 2014, and again by someone else in Florida last week.
This month’s post will not address a legal question but rather will comment on some FCRA news. It appears that a California congresswoman, Rep. Maxine Waters, has proposed significant changes to the FCRA. One of the proposed changes is a reduction in how long it takes for adverse information to “age off” your credit report. Right now, adverse information is removed from one’s credit report after a Biblically sanctioned seven year period. If Ms. Waters has her way, it will be removed after a four year period.
Putting aside the question of how likely Ms. Waters is to get her way (as a Democrat in a majority-Republican House of Representatives, not very), this news raises the question of what effect removing adverse information from consumers’ credit reports has on the broader economy, and whether the economy would benefit if adverse information came off more quickly than it currently does.
Businessweek puts the question this way:
Say you had a hard time keeping up with your credit card or mortgage payments during the last recession and subsequently defaulted, went delinquent or went bankrupt. Now, thanks to the magic of the Fair Credit Reporting Act, those problems are washed from your credit report and your FICO score rises faster than Vladimir Putin’s blood pressure during an OPEC meeting.
Here’s the hypothetical question: You just got your first credit card in seven years, so what will you do with it? Are you going to tuck it away safely in your wallet and vow only to use it in an absolute emergency or if The Hooters get back together for a tour? Or are you going to head out and ding up some charges in, say, the electronics aisle of the local Wal-Mart and the 12-year-old Scotch aisle of the local liquor store and the Ding Dongs aisle of the local convenience store and the…well, you catch the drift.
In other words, if X has a “bad” credit report with adverse information that limits his ability to borrow money, and if X’s credit report then improves after seven (or four) years, will X go out and borrow and spend money, driving the US economy?
I don’t know the answer to this question. But I like the fact that the question exists, if only because it suggests that the FCRA has repercussions that extend beyond the lawsuits that I typically handle.
Beginning in April, this blog has posted a series on “resellers,” which are companies that obtain data from the three credit bureaus (Experian, Equifax, and Trans Union), and merge it into a single “tri-merge” report for use by a client, typically a mortgage lender or auto lender. A typical tri-merge report will contain at least some inconsistencies – e.g., one bureau may report that X lived in Wisconsin whereas the other two bureaus may report that X only lived in California; or two bureaus may report that Y filed for bankruptcy in 2011 whereas the other bureau may not. The question we’ve been addressing is this: if a reseller simply reports what each bureau is telling it, without making any effort to reconcile inconsistencies of this type, has it violated 15 USC 1681e(b), which requires consumer reporting agencies to “follow reasonable procedures to assure maximum possible accuracy of the information” in its reports?
In this series, I have reviewed six (6) court opinions that addressed this question: Perez; Stublaski; Dively; Waterman; Willoughby; and Starkey. None of them are published decisions, and all of them were by trial courts as opposed to courts of appeals. For both reasons, none of them are “precedential,” or binding on other courts. However, they nevertheless give some insight into how courts are looking at this question.
The first thing we see is that the courts have, so far, favored plaintiffs and not resellers: of the six opinions, five of them refused to grant a reseller’s motion to dismiss or motion for summary judgment on a plaintiff’s claim.
The second thing we see is that the unsuccessful resellers have made some common “mistakes,” that is, they have each made one or two of the same arguments, which multiple courts have found unpersuasive. These arguments are:
1. In Waterman and Willoughby, the reseller defendants argued that a reseller is not bound by the “reasonable procedures” duty at 1681e(b); a reseller is only bound by the more limited duty at 1681e(e). The courts have rejected this argument, and rightly so: a reseller is by definition a “consumer reporting agency” (1681a(u)); and 1681e(b) applies to consumer reporting agencies, so 1681e(b) applies to resellers.
2. In Perez, Dively, and Starkey, and to a lesser extent in Waterman, the reseller defendants argued that they should be permitted to rely on the data that they receive from each of the three bureaus. There is some precedent for this – in Henson v. CSC Credit Servs., 29 F.3d 280 (7th Cir. 1994), a court of appeals said that a credit bureau can report what a court docket is saying about a court case, without actually pulling and reading the underlying court files to confirm things. But there are some obvious differences between a bureau’s decision to rely on a court docket, and a reseller’s decision to rely on the credit bureaus: for example, court dockets are widely considered to be accurate, whereas news reports suggest that most bureau reports have at least some inaccuracies; and there is typically only one court docket which says, without contradiction, what happened in a lawsuit, whereas there are three bureaus and (as we’ve seen) they don’t often all report the exact same things. When a reseller poses the question under 1681e(b) like this – “can I rely on a bureau report without doing anything more; even if the bureaus are saying different things” – the courts have been unwilling to say “yes.”
I have some ideas on how a bureau should ask a court to dismiss one of these claims under 1681e(b) against it. I used some of them in Stublaski, and I may use those and others in future cases. I don’t for a minute believe that the question at issue here is settled; it won’t be until multiple courts of appeal, each having had the benefit of better arguments than the two bad ones just listed here, decide the question.