InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FTC, CFPB say furnishers must investigate indirect disputes
On September 13, the FTC and CFPB (agencies) filed a joint amicus brief with the U.S. Court of Appeals for the Third Circuit, seeking the reversal of a district court decision that held furnishers of credit information are only obligated to investigate “bona fide” indirect disputes and may choose to decline to investigate other indirect disputes raised by consumers that are deemed frivolous. The agencies argued that this “atextual, judge-made exception” could undermine a key FCRA protection that allows consumers to dispute and correct inaccurate information in their credit reports, leading to a likely increase in consumer complaints related to credit reporting inaccuracies. Under the FCRA, consumers may file a direct dispute with a furnisher or file an indirect dispute with a consumer reporting agency (CRA), which may refer the dispute to the furnisher.
The case involves a direct dispute submitted by a plaintiff to a cable company, requesting an investigation into an allegedly fraudulent delinquent account listed on his credit report. The plaintiff informed the cable company that he was a victim of identity theft and that the account was opened in his name without his authorization. The cable company eventually referred the account to a debt collector (defendant) for collection after the plaintiff failed to provide requested information showing his account was opened due to fraud. An indirect dispute was later filed by the plaintiff with the CRA, which in turn sent the dispute to the defendant as the furnisher of the allegedly inaccurate information. After a second indirect dispute was filed noting the allegedly fraudulent account was the subject of litigation, the defendant removed the account from the plaintiff’s credit report and ceased collections. The plaintiff sued, asserting claims under the FCRA, FDCPA, and Pennsylvania law. The district court granted summary judgment in favor of the defendant, ruling that the plaintiff failed to provide evidence substantiating the basis of his dispute, and that “a furnisher is obligated to investigate only ‘bona fide’ indirect disputes and may therefore decline to investigate any indirect dispute it deems frivolous.”
In urging the appellate court to overturn the decision, the agencies countered in their amicus brief that the text of the FCRA is unambiguous—“furnishers must investigate all indirect disputes.” Nothing in the text suggests that a furnisher can choose not to investigate an indirect dispute if it determines it to be frivolous, the agencies stressed, further noting that if Congress intended to “create an exception for frivolous disputes, it knew how to do so,” and that in other parts of the statute Congress expressly provided that certain frivolous disputes do not need to be investigated.
The amicus brief also pointed out that under the FCRA, consumers are entitled to be notified about the outcome of their disputes, as well as given an opportunity to cure any deficiencies. The district court holding, the agencies said, would circumvent these requirements, thereby undercutting a central remedy under the FCRA that ensures consumers are able to dispute and correct inaccurate information in their credit reports. If furnishers were able to ignore disputes referred to them by CRAs, it could open an unintended loophole that would allow disputes to disappear “into a proverbial black hole,” the agencies asserted, emphasizing that if the district court’s interpretation is affirmed, consumers who submit an indirect dispute that is deemed frivolous by a furnisher may never receive any notice of that determination, and therefore, may never be able to cure any deficiencies or correct erroneous information in their credit reports.
The agencies also challenged whether the exception created by the district court’s ruling is necessary, as the FCRA already provides protections to furnishers from investigating frivolous disputes. Specifically, the statute allows CRAs to determine if a dispute a frivolous before forwarding a dispute to the furnisher. Moreover, furnishers “are not required to conduct an unreasonably onerous investigation into a conclusory or unsubstantiated dispute,” the agencies explained, stating that whether a furnisher has satisfied its obligation to conduct a reasonable investigation is normally a fact-intensive question for trial.
The Bureau noted in an accompanying blog post that it has also filed several other amicus briefs in other pending FCRA cases (previously covered by InfoBytes here) related to consumer reporting obligations.
WA Superior Court: Insurance commissioner overstepped in banning credit scoring in underwriting
On August 29, the Washington State Superior Court entered a final order declaring that the Washington Insurance Commissioner exceeded his authority when he issued an emergency rule earlier this year banning the use of credit-based insurance scores in the rating and underwriting of insurance for a three-year period. As previously covered by InfoBytes, several industry groups led by the American Property Casualty Insurance Association (APCIA) sued to stop the rule from taking effect. The rule was intended to prevent discriminatory pricing in private auto, renters, and homeowners insurance in anticipation of the end of the CARES Act, and specifically prohibited insurers from “us[ing] credit history to place insurance coverage with a particular affiliated insurer or insurer within an overall group of affiliated insurance companies.” The rule applied to all new policies effective, and existing policies processed for renewal, on or after June 20, 2021. Industry groups countered that the rule would harm insured consumers in the state who pay less for auto, homeowners, and renters insurance because of the use of credit-based insurance scores to predict risk and set rates.
According to a press release issued by APCIA, earlier this year the superior court issued a bench decision granting the trade group’s petition for a declaratory judgment and invalidating the rule. The superior court “held that the Commissioner could not rely on the more general rating standard statute that prohibited “excessive, inadequate, or unfairly discriminatory” rates to “eliminate all meaning from the more specific credit history statutes by which the legislature had authorized its use.” Calling the final order “an important victory for Washington consumers, particularly lower risk senior policyholders who were forced to pay more to subsidize higher risk policyholders because the rule eliminated the use of credit,” the trade groups said they were pleased that the court agreed with their position that the Commissioner “exceeded his authority when he acted contrary to the longstanding statute that authorized the use of credit in the property and casualty insurance space.”
CFPB examines finances and debt in Appalachia
On September 1, the CFPB released a report detailing family finances and debt in rural Appalachia, intended to provide a starting point in better understanding the needs and challenges of these consumers. The report—which is the first in a series regarding the finances of consumers living in rural areas—focuses on rural Appalachians, who, according to the Bureau, tend to earn less than consumers in other rural areas and have higher rates of subprime credit. According to the report, of the 26 million people living in the Appalachian region, 33 percent live in rural counties. Over 2 million Appalachians live in Persistent Poverty Counties (PPCs), which are defined as counties that have had poverty rates of 20 percent or higher for the past 30 years. Nearly one-in-four Appalachians are carrying some amount of medical debt, according to the report, compared with 17 percent of people nationally. Those people in the region with medical debt have more than double the rate of delinquency on their credit report compared to people without medical debt. Other findings of the report include, among other things, that: (i) 71 percent of rural Appalachians and 63 percent of those living in PPCs have an active credit card, compared to 80 percent of consumers nationally; (ii) auto loan balances equal 31 percent of household annual income for rural Appalachians, compared to 21 percent nationally; (iii) denial rates for mortgage applications in rural Appalachia were almost twice the rate of mortgage applications nationally; and (iv) though the high school graduation rate for individuals in Appalachia is higher than the national average, the percentage of individuals who attended some college is significantly lower than the national average. According to the Bureau, these circumstances have “led to disproportionately high levels of distress in rural Appalachians’ consumer financial lives.”
3rd Circuit vacates dismissal of FCRA lawsuit regarding sovereign immunity
On August 24, the U.S. Court of Appeals for the Third Circuit vacated the dismissal of an FCRA lawsuit, holding that the federal government does not have sovereign immunity under the statute and can be held liable for reporting requirement violations. The plaintiff sued the Department of Agriculture (USDA) and a student loan servicer for allegedly reporting two loans as past due even though he claimed both were closed with a $0 balance. The plaintiff notified the relevant consumer reporting agency who in turn notified the USDA and the servicer. When neither entity took action to investigate or correct the disputed information, the plaintiff sued all three parties for damages under Section 1681n and 1681o of the FCRA. The USDA moved to dismiss for lack of subject matter jurisdiction based on sovereign immunity claims, which the district court granted on the grounds that the United States and its agencies are not subject to liability under the FCRA—a decision in line with opinions issued by the 4th and 9th Circuits.
On appeal, the 3rd Circuit disagreed, instead siding with opinions issued by the D.C. and 7th Circuits that reached the opposite conclusion. According to the 3rd Circuit, the federal government and its agencies enjoy sovereign immunity from civil suits unless Congress unambiguously waives it within a statute. The FCRA provides that any “person” who either negligently or willfully violates the statute is liable to the consumer for civil damages, the appellate court wrote, noting that the term “person” is defined to include any “government or governmental subdivision or agency.” The appellate court stressed that Congress need not express its intent in any particular way, and that courts need only look at the statutory text to discern Congress’ intent. Where Congress wanted to use a narrower definition of “person” in the FCRA, it did so, the appellate court said, pointing to where the FCRA specifically excludes the federal government from the statutory obligations for persons who make adverse employment decisions based on credit reports. “We presume, therefore, that Congress’s failure to do so in §§ 1681n and 1681o was deliberate and intended to convey the full statutory definition,” the 3rd Circuit wrote, finding that Congress unambiguously waived the government’s sovereign immunity in enacting FCRA.
8th Circuit affirms rulings for defendant in FCRA suits
On August 16, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court’s dismissal of a complaint in an FCRA case. According to the opinion, the plaintiff filed for Chapter 7 bankruptcy protection. The bankruptcy court entered a discharge, and when the plaintiff obtained the credit reports, among other things, one debt was still being reported as “Current; Paid or Paying as Agreed” with an outstanding balance. The plaintiff filed suit, alleging the defendants violated the FCRA because they “do not maintain reasonable procedures to ensure debts that are derogatory prior to a consumer’s bankruptcy filing do not continue to report balances owing or past due amounts when those debts are almost certainly discharged in bankruptcy.” The plaintiff claimed to suffer emotional distress and obtained credit at less favorable rates. The defendants jointly moved to dismiss the complaint, contending that the plaintiff failed to plausibly allege the reporting. The district court granted the motion and dismissed the case with prejudice.
According to the 8th Circuit, the plaintiff’s complaint was “too thin to raise a plausible entitlement to relief.” The appellate court noted that, “[i]t is not the credit reporting agencies’ job to “wade into individual bankruptcy dockets to discern whether a debt survived discharge.” The appellate court ultimately agreed with the district court that “’there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’”
The same day, in a separate suit, the 8th Circuit affirmed another district court’s dismissal of a complaint in an FCRA case. According to the opinion, the plaintiff filed for Chapter 7 bankruptcy protection, and after the debts were discharged, the plaintiff’s credit report still listed a debt with an outstanding balance that was noted as “open” and “past due.” The plaintiff filed suit, alleging the defendants violated the FCRA “by neglecting to ‘maintain reasonable procedures to ensure debts that are derogatory prior to a consumer’s bankruptcy filing do not continue to report balances owing or past due amounts when those debts are almost certainly discharged in bankruptcy.’” The plaintiff sought damages resulting from emotional distress and financial harm, but the district court granted summary judgment in favor of defendants, agreeing that plaintiff failed to show proof of actual damages.
On the appeal, the 8th Circuit noted that it was the bankruptcy, not the information in plaintiff’s credit report, that led to her applications for credit cards being denied. Regarding her allegation about emotional distress, the appeals court reasoned that plaintiff “‘suffered no physical injury, she was not medically treated for any psychological or emotional injury, and no other witness corroborated any outward manifestation of emotional distress.’” Accordingly, the court concluded that defendants were entitled to judgment as a matter of law.
3rd Circuit adopts new “reasonable reader” standard for evaluating accuracy of credit reports
On August 8, the U.S. Court of Appeals for the Third Circuit issued an opinion in a matter consolidated on appeal concerning claims of alleged violations of the FCRA brought by several student loan borrowers. According to the opinion, each of the three borrowers defaulted on their student loan payments. The original lenders closed the accounts and transferred the loans to other lenders after the borrowers were more than 120 days late in their payments. The borrowers claimed that a “pay status” notation included in each of their credit reports, which read “Account 120 Days Past Due Date,” was inaccurate and could create the misleading impression that the borrowers were currently four months behind on payments when they did not owe a balance to the previous creditors. The consumer reporting agency (CRA) responsible for the credit reports at issue countered that the notations accurately reflected the historical status of the closed accounts. The borrowers appealed, arguing that the district court misapplied the “reasonable creditor” standard and that the credit reports did not meet the FCRA’s “maximum possible accuracy” requirement.
On appeal, the 3rd Circuit agreed with the CRA’s interpretation, holding that the credit reports “contain multiple conspicuous statements reflecting that the accounts are closed and Appellants have no financial obligations to their previous creditors.” As such, “[t]hese statements are not in conflict with the Pay Status notations, because a reasonable interpretation of the reports in their entirety is that the pay status of a closed account is historical information,” the appellate court wrote. However, while the 3rd Circuit affirmed previous rulings dismissing the cases issued by the U.S. District Court for the Eastern District of Pennsylvania, it concluded that the “reasonable creditor” standard that the district court applied did not accurately reflect how the FCRA contemplates a range of permissible users, such as employers, investors, and insurers, and not just creditors. To account for this, the 3rd Circuit adopted a new standard for evaluating whether credit reports are inaccurate or misleading when read in their entirety by a “reasonable reader,” and applied that test in its precedential opinion. “A court applying the reasonable reader standard to determine the accuracy of an entry in a report must make such a determination by reading the entry not in isolation, but rather by reading the report in its entirety,” the appellate court said.
CFPB reports on credit card line decreases
On June 29, the CFPB issued a report analyzing the impact of credit card line decreases (CLD) on consumers. The report is a part of a CFPB series that examines consumer credit trends using a longitudinal sample of approximately five million de-identified credit records maintained by one of the three nationwide consumer reporting agencies. The report described how credit card companies increasingly used credit line decreases during both the Great Recession and at the start of the Covid-19 pandemic. According to the Bureau, in issuing the report it “sought to examine the importance and impact of these decisions by credit card companies” because of the “critical role credit plays in financial resiliency, especially during a downturn.” Key findings of the report include, among other things, that: (i) 67 percent of consumers who had CLDs did not show evidence of a recent delinquency on any credit card, and 83 percent had no delinquency on the card that received the CLD; (ii) the median amount of credit decreased by approximately 75 percent for consumers across different credit score tiers; (iii) the median deep subprime, subprime, near-prime, and prime account utilization reached 94 percent when the CLD was applied; and (iv) the median credit scores for consumers with a recent card delinquency on any card decreased between 33 and 87 points.
CFPB says states may regulate credit reporting markets
On June 28, the CFPB issued an interpretive rule addressing states’ authority to pass consumer-reporting laws. Specifically, the Bureau clarified that states “retain broad authority to protect people from harm due to credit reporting issues,” and explained that state laws are generally not preempted unless they conflict with the FCRA or “fall within narrow preemption categories enumerated within the statute.” Under the FCRA, states have flexibility to enact laws involving consumer reporting that reflect challenges and risks affecting their local economies and residents and are able to enact protections against the abuse and misuse of data to mitigate these consequences.
Stating that the FCRA’s express preemption provisions have a narrow and targeted scope, the Bureau’s interpretive rule provided several examples such as (i) if a state law “were to forbid consumer reporting agencies [(CRA)] from including information about medical debt, evictions, arrest records, or rental arrears in a consumer report (or from including such information for a certain period of time), such a law would generally not be preempted; (ii) a state law that prohibits furnishers from furnishing such information to a CRA would generally not be prohibited; and (iii) if a state law requires a CRA to provide information required by the FCRA at the consumer’s requests in a language other than English, such a law would generally not be preempted. The interpretive rule is effective upon publication in the Federal Register.
The issuance of the interpretive rule arises from a notice received by the Bureau from the New Jersey attorney general concerning pending litigation that involves an argument that the FCRA preempted a state consumer protection statute. The Bureau stated that it “will continue to consider other steps to promote state enforcement of fair credit reporting along with other parts of federal consumer financial protection law,” including “consulting with states whenever interpretation of federal consumer financial protection law is relevant to a state regulatory or law enforcement matter, consistent with the State Official Notification Rule." As previously covered by InfoBytes, the Bureau issued an interpretive rule last month, clarifying states’ authority to bring enforcement actions for violations of federal consumer financial protection laws, including the CFPA.
CFPB issues final rule re: credit reporting on human trafficking victims
On June 23, the CFPB issued a final rule implementing amendments to the FCRA intended to assist victims of human trafficking. According to the Bureau’s announcement, the final rule prohibits credit reporting agencies (CRAs) from providing reports containing any adverse items of information resulting from human trafficking. The final rule amends Regulation V to implement changes to the FCRA enacted in December 2021 in the “Debt Bondage Repair Act,” which was included within the National Defense Authorization Act for Fiscal Year 2022. (Covered by InfoBytes here.)
Among other things, the final rule establishes methods available for trafficking victims to submit documentation to CRAs establishing that they are a survivor of trafficking (including “determinations made by a wide range of entities, self-attestations signed or certified by certain government entities or their delegates, and documents filed in a court where a central issue is whether the person is a victim of trafficking”). The final rule also requires CRAs to block adverse information in consumer reports after receiving such documentation and ensure survivors’ credit information is reported fairly. CRAs will have four business days to block adverse information once it is reported and 25 business days to make a final determination as to the completeness of the documentation. All CRAs, regardless of reach or scope, must comply with the final rule, including both nationwide credit reporting companies and specialty credit reporting companies.
The final rule takes July 25.
District Court approves $1.4 million FCRA settlement
On June 17, the U.S. District Court for the Southern District of California granted final approval of a class action settlement resolving claims that a hospitality company violated the FCRA and various California laws. According to the order, plaintiffs filed a putative class action alleging that the company violated the FCRA by failing to make proper disclosures and obtain proper authorization during its hiring process. Additionally, the plaintiffs claimed that the company’s background check forms were allegedly defective because they “contained information for multiple states for whom background checks were run” in violation of California’s Investigative Consumer Reporting Agencies Act and other California laws. Under the terms of the settlement, the defendant will pay nearly $1.4 million, of which class members will receive $821,714 in total ($63.29 per class member), $10,127 will go towards settlement administration costs, $349,392 will cover attorneys’ fees, and $5,000 will be paid to each of the two named plaintiffs.