Should credit reporting agencies (CRAs) be held liable under the Fair Credit Reporting Act (FCRA) for alleged reporting inaccuracies that turn on legal disputes? According to the Second Circuit in a recent decision, the answer is no. The appellate court held the “FCRA does not require” CRAs to “resolve unsettled legal questions.” However, the court cautioned its holding does not mean CRAs “are never required by the FCRA to accurately report information derived from the readily verifiable and straightforward application of law to facts.”
As background, in 2008 the plaintiff took out an Excel Grad student loan. In 2012, the plaintiff filed for bankruptcy. The final decree of discharge stated the plaintiff was “released from all dischargeable debts,” but clarified “[d]ebts for most student loans” are not discharged. The plaintiff then entered into a loan modification agreement with his student loan servicer. The loan modification agreement and payment information were furnished to one of the CRAs and listed on the plaintiff’s credit report. The plaintiff brought an action against the CRA in the district court for the Southern District of New York alleging the continued reporting of his student loan violated §1681e(b) of the FCRA, which requires CRAs to “follow reasonable procedures to assure maximum possible accuracy of the information” in their reports.
The district court granted the CRA’s motion for summary judgment relying on a declaration from the student loan servicer attesting that “the [bankruptcy] court determined that [the plaintiff’s] loan was non-dischargeable, and that therefore its inclusion on his credit report was not an inaccuracy.” The plaintiff appealed.
The Second Circuit disagreed with the district court’s mode of analysis, i.e., analyzing whether there was a genuine factual dispute as to whether the funding of plaintiff’s loan was from a private or governmental source. But the appellate court affirmed on the alternate ground that the legal inaccuracy alleged was not a cognizable claim under the FCRA.
The Second Circuit found in order to prevail under section §1681e(b), the plaintiff must establish the consumer report contains an inaccuracy. The court found the inaccuracy alleged did not meet the standard because it “evades objective verification.” There was no bankruptcy order explicitly discharging the debt and the student loan servicer as well as the plaintiff continued to “treat the debt as outstanding.” Instead, to determine whether the debt was dischargeable would require resolving a dispute over the funding and structure of the original student loan program. “The bespoke attention and legal reasoning required to determine the post-bankruptcy validity of [the plaintiff’s] debt means that its status is not sufficiently objectively verifiable to render [the plaintiff’s] credit report ‘inaccurate’ under the FCRA.”
The question of whether CRAs should be held liable under the FCRA for legal or factual inaccuracies is a contested issue. As we blogged about here, on May 5, the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission together filed an amicus brief in another Second Circuit appeal arguing the FCRA does not distinguish between “legal” and “factual” inaccuracies, and thus CRAs may be held liable for failing to maintain reasonable procedures to prevent even inaccuracies that turn on legal questions regarding the underlying debt or credit information. Similarly, the CFPB filed an amicus brief in the Eleventh Circuit also arguing the FCRA does not exempt furnishers from investigating disputes based on legal, as opposed to factual, inaccuracies.
We will continue to monitor activity in these cases and post updates as they occur.