How the FCRA Accurate Reporting Requirement Interacts with Temporary Forbearance Plans

This past summer, the United States Court of Appeals for the Eleventh Circuit evaluated a $25-per-month mortgage forbearance plan and concluded that reporting the borrower as delinquent despite her forbearance payments was accurate and not materially misleading.  The case is Felts v. Wells Fargo Bank, N.A., 893 F.3d 1305, 1309 (11th Cir. June 27, 2018).

In 2009, as part of refinancing her home in Carmel, Indiana, Christina Felts executed a Note and Mortgage that required her to make monthly mortgage payments of over $2,000.  Felts lost her job three years later.  In light of her unemployment, she contacted her loan servicer to discuss a revised payment plan.  Ultimately, she enrolled in an unemployment forbearance program offered by Fannie Mae and administered by her loan servicer. 

The Plan terms were detailed in a letter to Felts that explained that she would be required to make “monthly forbearance plan payments” of $25.00 per month beginning in September 2012 and ending in February 2013.  The letter further clarified that even though her monthly statement would “continue to show your regular mortgage payment amount,” she only needed to make the $25.00 monthly forbearance payments.  Finally, the letter provided that (1) the loan servicer would hold off on any foreclosure proceedings during the time of the forbearance, (2) the loan servicer would report that Felts was paying under a “partial payment agreement,” and (3) regular mortgage payments would still continue to accrue and would be due upon completion of the plan or upon employment.  The letter explained that “[e]ven though you are participating in this Plan, you remain responsible for all other terms and conditions of your existing mortgage.”

Prior to Felts’ participation in the Plan, a representative from the loan servicer explained the terms in a recorded telephone conversation.  Felts specifically asked whether her payments would be considered late because she was not paying her complete monthly payment, clarifying, “But you did say each month even though it’s refigured as this it still shows up as a late payment?”  The loan servicer representative responded, “Yes.  Because it’s not the contractual payment.”  Felts confirmed that she understood.

Felts made timely $25.00 monthly payments, and the loan servicer reported her as past due and delinquent because she was not making the full monthly payments.  Subsequently, when Felts attempted to get a new loan, her credit report reflected this delinquency reporting.  Felts disputed the account reporting, but the loan servicer took the position that it was accurate to report her as past due and delinquent during the months that she paid the nominal forbearance fee.

The Eleventh Circuit agreed.  In the opinion, the court concluded that the delinquency reporting was accurate because Felts did not make the full monthly payments that she was obligated to make under her Note, and the loan servicer’s promise to forebear foreclosure while she made nominal payments did not change her contractual obligations to make the complete payments.

The court addressed several specific arguments:

First, the court held that it was technically accurate to report Felts as delinquent:  “As Felts has not identified any fact in the record establishing that the Plan legally modified the Note, the information [the loan servicer] reported regarding Felts’ compliance with the terms of the Note was not inaccurate: [the loan servicer] reported that (1) the Scheduled Monthly Payment Amount for the Note was $2,197.38, which Felts agrees that it was; and (2) Felts did not pay the amount the Note required her to pay beginning in July 2012, which Felts concedes she did not do.”

Next, the court distinguished cases cited by Felts as dealing with permanent loan modifications that legally amended the terms of the note and emphasized that, during the forbearance plan, there was no permanent, legal modification of Felts’ mortgage obligations.  According to the court, “[a] loan modification agreement, by contrast, permanently legally alters a borrower’s obligations under the original loan agreement.”  

Finally, the court found that the reporting was not so misleading as to be inaccurate.  Basically, Felts felt that the delinquency reporting grossly misrepresented her diligence in trying to pay her mortgage.  Despite the sympathetic nature of this argument, the court rejected it for its lack of legal relevance.  According to the court, this “argument again ignores that [Felts’] partial payments under the Plan simply were not the payments owed under the Note.  Unlike in the cases Felts cites, where the borrowers no longer legally owed the amounts listed, Felts did owe payments under the Note, which she failed to make.  Therefore, it was not misleading for [the loan servicer] to report that she was not making payments under the Note as agreed … .”  Further, the court observed that while Felts “likens her position to that of a person who made no payments at all, she ignores that the Plan provided her with a valuable benefit: she was permitted to stay in her home. Without the Plan, [the loan servicer] could have foreclosed on Felts’ mortgage following her inability to make full payments under the Note.”

This case provides helpful precedent to loan servicers responding to allegations that they failed to properly review and investigate consumer credit disputes.  If the loan servicer can show that the reported information was accurate, there can be no violation of the statutory duty to investigate disputes.  Also, this case provides helpful reasoning in evaluating temporary, as opposed to permanent, loan modifications and a loan servicer’s ability to report based on the original Note terms. 

Troutman Sanders will continue to analyze breaking cases as this area of the law develops.