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Bankruptcy and the FCRA:Responsibilities Under the Fair Credit
Reporting Act After a Bankruptcy
Discharge
Ryan M. Holz
Locke Lord LLP
American Conference Institute – Annual Advanced Forum on Consumer Finance
Class Actions and Litigation
Chicago, Illinois – July 2017
Table of Contents■ Recent Spike in FCRA Litigation
■ Typical Fact Pattern in FCRA Case.
■ Cases against furnishers
■ Cases against Credit Reporting Agencies (CRAs)
■ Developing Legal Issues
■ Post-Discharge Reporting Issues
■ Reporting a zero balance.
■ Anything else?
■ Reporting post-discharge payments.
■ Negligent Violation v. Willful Violation (and why it matters)
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Recent Spike in FCRA Litigation
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Number of Cases Filed by Year
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Source: WebRecon.com
Why the Recent Increase in FCRA Claims?■ Significant increase in bankruptcy filings as a result of 2008-
2010 recession.■ More bankruptcies equals more potential bankruptcy-related FCRA
claims.
■ Bankruptcy-related FCRA claims are a lagging indicator.■ Borrowers who filed for bankruptcy protection during the mortgage
crisis between 2008 and 2010 have recently completed their
bankruptcy plans and received discharge orders.
■ Consumer rights attorneys have teamed up with consumer
bankruptcy firms.
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Typical Fact Pattern in FCRA Cases Stemming
From Bankruptcies – Creditors/Servicers
■ Cases against creditors/servicers as furnishers of credit
information.■ Borrower files a bankruptcy petition listing their mortgage loan as a
secured debt;
■ Bankruptcy court enters a discharge order;
■ Creditor reports the debt as being part of the borrower’s bankruptcy
proceeding, but does not report the balance owed as zero;
■ Borrower sends a dispute to the CRAs contesting the reporting of
the mortgage loan;
■ CRA passes dispute along to creditor/servicer;
■ Creditor/servicer reviews the reporting and confirms that the loan is
being reported as part of a bankruptcy; and
■ Creditor /servicer believes the loan is being reported correctly and
informs the CRAs that no changes are required.
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Providing Accurate Credit Information
■ How can creditors/servicers provide more accurate credit
information?
■ Front-end changes.■ Better communication between bankruptcy counsel and the
creditor/servicer.
■ Better communication within departments of the creditor/servicer.
■ Back-end changes.■ Training recipients of disputes to engage in critical evaluation.
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Typical Fact Pattern in FCRA Cases
Stemming from Bankruptcies - CRAs■ What changes in cases against CRAs?
■ Initial bankruptcy steps are the same but CRA
either:■ fails to send the dispute to the furnisher; or
■ fails to implement changes provided by furnisher.
■ CRAs usually (but not always) send Automated
Consumer Dispute Verification (ACDV) to furnishers
to help shield themselves from liability.
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Developing Legal Issues – Zero Balance…■ FTC Commentary had previously stated: “A consumer report
may include an account that was discharged in bankruptcy
(as well as the bankruptcy itself), as long as it reports a
zero balance due to reflect the fact that the consumer is no
longer liable for the discharged debt.” 16 C.F.R. 600 App.
§607(b)(6) (emphasis added).
■ FTC Commentary has been rescinded as responsibility for
FCRA rulemaking has been turned over to the CFPB.
■ Nevertheless, the majority of the caselaw concludes that a
discharged loan must be reported with a zero balance.
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…Or Not?■ Not all courts have held that zero balance post-discharge is required.
■ In Riekki v. Bayview Loan Financial Servicing, 2016 WL 4083216, *2 (D. Nev. Jul. 28,
2016), the District Court of Nevada did not mention the FTC Commentary and instead
found that 15 U.S.C. Sec. 1681(c) permits reporting for seven years after a
bankruptcy discharge. As such, the district court dismissed plaintiff’s FCRA claim
based on the failure to report the debt with a zero balance, holding “[p]laintiff’s
bankruptcy discharge was confirmed on October 6, 2014; however, defendant is
entitled to report the debt for a statutorily permitted seven years.”
■ See also Abeyta v. Bank of Am., N.A., 2016 WL 304308 (D. Nev. Jan. 25, 2016)
(same).
■ Riekki appears to be an outlier. While 15 U.S.C. Sec. 1681(c) does allow for
reporting for up to seven years, it does not address the content of the credit
reporting.■ In other words, you can square section 1681(c) and the FTC Commentary by allowing
for reporting of the debt for seven years as long as the balance is reported as zero.
■ It remains the more prudent approach for creditors, servicers and other
furnishers to report a zero balance.
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…And What Else?■ Well-accepted that furnisher must report the
debt as “discharged,” “included in
bankruptcy,” or similar language.■ Should not report as “charged off” or similar
language.
■ Significant gray area regarding what else a
furnisher can and cannot report post-
discharge.
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Recent Decisions■ Jackson v. Experian Info. Solutions, Inc., 2016 U.S. Dist. LEXIS 65846
(N.D. Ill. May 19, 2016) (“[T]he Court sees nothing in the FTC’s guidance
that indicates that if a zero balance is reported for a discharged debt, the
report is accurate per se, no matter what or how much additional
information the report contains. Even were the Court to defer to the
FTC’s guidance, there would be an open question regarding whether
additional information contained in a trade line that reported a
discharged debt with a zero balance made the trade line inaccurate.”).
■ Freedom v. CitiFinancial, LLC, 2016 U.S. Dist. LEXIS 97533 (N.D. Ill.
Jul. 25, 2016) (denying motion to dismiss when servicer was reporting a
zero balance, but also scheduled monthly payment amounts; “reporting
a ‘scheduled payment’ could create a mistaken impression that Plaintiff
still owed on the account which was not accurate because his debt had
been discharged in bankruptcy”).
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Developing Legal Issues – Post-Discharge Payments■ Significant questions over how to handle post-discharge
payments.
■ Post-discharge payments are often made when the borrower
does not reaffirm but remains in the property post-discharge
and continues to make payments to avoid foreclosure of the
property.
■ Borrowers want those continued payments reported to
enhance their credit score.
■ Creditors/furnishers often struggle with how to report
payments in conjunction with zero balance.
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Post-Discharge Payments, Cont’d■ Most courts have held that when a debt is reported with zero
balance, post-discharge payments are not required to be
reported.
■ Schueller v. Wells Fargo & Co., 559 Fed. Appx. 733 (10th Cir. 2014) (holding that after
reporting debt with zero balance and having been discharged in bankruptcy, there is
no requirement to report post-discharge payments and failure to do so is not
misleading); see also Groff v. Well Fargo Home Mortg., Inc., 108 F. Supp. 3d 537
(E.D. Mich. 2015) (same); Horsch v. Wells Fargo Home Mortg., 94 F. Supp. 3d 665
(E.D. Pa. 2015 (same); Dixon v. Green Tree Servicing, LLC, 2015 WL 2227741 (N.D.
Ind. May 11, 2015 (same).
■ For those courts that hold that a zero balance is not required
(District of Nevada), it would make sense for furnishers
within those jurisdictions to report continuing payments.
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Developing Legal Issues - Negligent
Violation v. Willful Violation■ 15 U.S. Code § 1681n
■ Any person who willfully fails to comply with any requirement imposed under this
subchapter with respect to any consumer is liable to that consumer in an amount
equal to the sum of—
■ actual damages or statutory damages of between $100 and $1,000; and
■ in the case of any successful action to enforce any liability under this section, the costs of
the action together with reasonable attorney’s fees.
■ 15 U.S. Code § 1681o
■ Any person who is negligent in failing to comply with any requirement imposed under
this subchapter with respect to any consumer is liable to that consumer in an amount
equal to the sum of—
■ any actual damages sustained by the consumer as a result of the failure; and
■ in the case of any successful action to enforce any liability under this section, the costs of
the action together with reasonable attorney’s fees as determined by the court.
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Establishing a Negligence Claim■ To prove a negligent violation of the FCRA, a consumer must show a
causal relationship between the defendant’s FCRA violation and the
claimed harm, such as a loss of credit. Without this connection, there is
no liability.
■ The violation must be both the factual cause (Wu v. Trans Union, LLC,
2006 WL 4729755 (D. Md. May 2, 2006)) and the proximate cause of
plaintiff’s injuries (Crabill v. Trans Union, LLC, 259 F.3d 662 (7th Cir.
2001)).
■ Actual damages can include emotional distress damages even in the
absence of economic damages, but it is a very high standard. Jackson
v. Experian Info. Solutions, Inc., 2017 WL 635148 (N.D. Ill. Feb. 16,
2017).
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Establishing a Willful Claim■ Establishing willfulness requires establishing either a
knowing or reckless violation of the statute. This is
determined via two inquiries:
■ Is there an objectively reasonable interpretation of the FCRA under
which the conduct would be lawful? If so, then the violation is not
willful; subjective intent is irrelevant.
■ If the conduct was unreasonable, how unreasonable was it? To rise
to the level of recklessness, the risk of violating the FCRA must have
been substantially greater than a mere careless reading of the
statute.
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Why It Matters■ Frequently, FCRA plaintiffs have not suffered any actual
damages.
■ In cases with no actual damages, claimant must establish
willfulness to recover.
■ A negligent violation with no actual damages means no
successful claim and no successful claim means no
attorneys’ fees.
■ So the distinction between a negligent and a willful violation
could be the difference between liability and no liability.
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