Fair Credit Reporting Act Compliance

April 9, 2020

The Fair Credit Reporting Act (“FCRA”) is a federal law enacted in 1970 to promote the accuracy, fairness, relevancy, and privacy of consumer information in the file of credit reporting agencies. Banks and other financial institutions are an important link in the consumer credit reporting chain, and in a variety of circumstances, they are subject to regulation under the FCRA. Failure to understand and comply with one’s obligations under the FCRA can result in liability for statutory or actual damages, costly litigation, and potential attorney fee awards and sanctions. As with any regulation it is important to ensure compliance with the law and regulations to avoid violations and liability.

The FCRA prohibits financial institutions from furnishing information to consumer reporting agencies which the financial institution knows, or has reasonable cause to believe, is inaccurate. Likewise, a financial institution shall not furnish information to a credit reporting agency where it has received notice that the specific information is inaccurate, and the information is, in fact, inaccurate. Whether this reporting is negligent or willful the financial institution will still be liable for damages, and if the customer is successful, attorney fees and costs. Depending on the nature of the misconduct, there may also be punitive damages.

On March 27, 2020, President Trump signed the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). The CARES Act amends the FCRA to provide that when a lender makes an accommodation for one or more payments to a consumer borrower that is otherwise current on their loan the lender must continue to report the loan as current during the period of the accommodation. If the loan was delinquent prior to the accommodation, the loan may be reported as delinquent.

The information requested by or provided to credit reporting agencies can be complicated and involve both factual and legal information. Determining whether information is “inaccurate” under the FCRA may be a complex question. One potentially tricky area of reporting relates to the furnishing of information to consumer reporting agencies regarding debts which have been discharged in bankruptcy. If a financial institution’s customer has received a bankruptcy discharge, they may be reviewing their credit reports and attempting to improve their credit rating. Information provided to the credit reporting agencies must accurately state the current status and payment information related to any debt discharged. Information which does not reflect the discharge, or which shows information which the consumer alleges is misleading or inaccurate in light of the discharge, could be claimed to be a violation of the FCRA.

Reporting secured debt post-discharge can present concerns for a financial institution. While the bankruptcy discharge releases a customer from personal liability, a mortgage lien or security interest may continue with respect to the secured asset. This creates tension both from a collection standpoint – a bank must be careful not to demand payment for a discharged debt – and from a reporting standpoint. All though case law varies somewhat depending on the jurisdiction and the factual background, courts have generally agreed that because the nature of a discharged mortgage is only as a lien enforceable against property, and not as a personal debt, reporting the secured debt as discharged with zero balance, with no payments made after the date of discharge is accurate, even if a consumer has made voluntary payments after discharge. This is because the consumer’s credit report should only include information about debts owed by the consumer, which would no longer include the mortgage debt.

A financial institution may also be subject to regulation as a user of consumer credit reports. A consumer credit report may only be requested for certain, enumerated permissible reasons, and pulling a credit report without such a reason will also be a violation of the FCRA. A user must not only have an authorized use for the consumer report, but must also certify that authorized use prospectively, either generally or specifically. But a user’s obligations do not stop there. If a user of a consumer credit report takes any adverse action based, in whole or in part, on any information contained within that consumer credit report, they must provide notice of the adverse action to the consumer. These notices must contain specific information regarding the adverse action, the report itself, and the consumer’s right to obtain a report and dispute its accuracy.

As with many consumer protection statutes, violations can result in legal costs, liability, and attorney fee awards for the consumer’s attorney. Even if the statute has not been violated, or if the potential damages which appear to result from the mistakenly reported information, a claim of violation may still result in significant expense for defense of the alleged claim. Therefore, to ensure all credit reporting is accurate and consistent in each particular instance, if there is any doubt as to what is being reported or a notice to be given, a complete and careful review should be undertaken.

This information is general in nature and should not be construed as tax or legal advice.