Thursday, May 17, :50 1:40 PM. The Credit Reporting Act: Not Just About Credit

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1 45 th Annual Bench-Bar & Boardroom Conference Thursday, May 17, :50 1:40 PM The Credit Reporting Act: Not Just About Credit 10.0 CLE Hours, Including 2.0 Ethics Hours in Missouri 10.0 CLE Hours, including 2.0 Ethics in Kansas 2300 Main Street, St. 100 KC, MO phone fax

2 Michael Rapp, Stecklein & Rapp Chartered Michael is a licensed attorney in the state of Kansas and Missouri. He is a member of the American Bar Association, Kansas City Metropolitan Bar Association, Wyandotte County Bar Association, as well as the National Association of Consumer Advocates. Since graduating law school, Michael has focused his practice exclusively on Consumer Law with a concentration on Fair Debt Collection Practices (FDCPA), Credit Reporting (FCRA) and Telephone Consumer Protection (TCPA). Michael regularly gives talks around the Kansas City area to community groups on the topics of Debt and Credit and blogs about FDCPA stories of interest providing short, good-to-know tips for those interested in keeping their finger on the pulse of consumer protection law. Michael Rapp graduated from UMKC School of Law, where he served as Research Administrator for Friedman on Leases and was awarded the Sanford B. Ladd Award for his exceptional achievement in Real Estate Law. Prior to attending law school, Michael served his country, was decorated, and honorably discharged from the United States Air Force.

3 UNDERSTANDING FAIR CREDIT REPORTING ACT VIOLATIONS AND CASES Stecklein & Rapp Chartered 1

4 What We Do: 2 We sue Credit Reporting Agencies Background Check Companies Banks Debt Collectors/Debt Buyers Employers Shady Car Lots 2

5 Summary: The Statute Fair Credit Reporting Act (15 U.S.C et seq.) Regulates content of consumer reports, especially including the accuracy of data contained in those reports full text of statute is available here: powerful federal consumer statute that often works in conjunction with other federal consumer statutes (FDCPA, FCBA, TCPA). State Counterpart (KSA ) 3

6 Summary: The Statute Like it or not, every consumer has at least one, if not several, report cards that purport to assess the consumer about a variety of qualities such as creditworthiness, or quality as employee or tenant 4

7 What is in the FICO Score? 5 10% 10% 35% On Time Payments Capacity Used 15% Length of History 30% New Credit Types of Credit 5

8 Credit score basics FICO prepares the credit scores for each credit bureau Equifax = Beacon Experian = Experian-Fair Isaac Risk Model TransUnion = Empirica FAKO Individual lenders may have own internal scoring process 6

9 Credit score basics Not everyone has a credit score: Must have at least one account on your credit report that has been open at least six months that the creditor has updated at least once during that six months 7

10 Summary: The Statute Two purposes: For credit industries (including banking system) "The banking system is dependent upon fair and accurate credit reporting. Inaccurate credit reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence which is essential to the continued functioning of the banking system. 1681(a)(1). For consumers: "a need to insure that consumer reporting agencies exercise their grave responsibilities with fairness, impartiality, and a respect for the consumer s right to privacy." 1681(a)(4). 8

11 FCRA Guiding Principles 9 Privacy Limited third party access to consumer reports Accuracy Responsibilities of consumer reporting agencies and data furnishers dispute resolution process Fairness Adverse action notices to affected consumers Obsolete information cannot be reported 9

12 Summary: The Statute Intended to protect consumers from the willful and/or negligent inclusion of inaccurate information in their credit reports. To that end, the FCRA regulates the collection, dissemination, and use of consumer information, including consumer credit information Enforced by the Federal Trade Commission (FTC), the Consumer Financial Protection Bureau (CFPB) and private litigants. 10

13 FCRA and Consumer Reports What are consumer reports? See 1681a(d)(1) Any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer s eligibility for: credit or insurance to be used primarily for personal, family, or household purposes; employment purposes; or any other purpose authorized under section 604 [ 1681b]. 11

14 Credit reporting players Consumer: An individual (not an entity). Credit reporting agency ( CRA ): An entity that provides consumer reports. Furnisher: Not defined in Act. Can be anyone who furnishes consumer information to a CRA. User: One who accesses the report and views it. 12

15 Credit reporting players Subscriber: Many furnishers are also subscribers. Subscription to a CRA enables a business to obtain credit reports about potential customers. Subscription contract also requires the business to furnish the CRA with information about existing customers accounts so that the CRA can include them in its file for that person. 13

16 Credit reporting players Consumer Data Industry Association (CDIA) Creator of Metro 2, a standard automated data reporting format used by furnishers to report information electronically to the CRA s. Data is uploaded electronically in an order specified by the Metro 2 format and using Metro 2 codes. 14

17 Credit reporting players Online Data Exchange (OLDE) Developed and administers e-oscar: Online Solution for Complete and Accurate Reporting, a web-based dispute notification system used by the CRA s and furnishers when a consumer disputes an account appearing on a consumer report. 15

18 What is a Consumer Reporting Agency? 16 Tenant screeners Check verifiers Background checking companies Credit reporting Agencies Resellers of all the above 16

19 Importance of consumer reports Three primary areas: assessing credit worthiness, employment background checks, and tenant / housing background checks. access to credit: two scenarios prime credit -- ability to borrow at prime rates access to credit altogether -- outright credit denials employee screening negative information on background report can prevent consumer from being employed in large sectors of the economy tenant screening similarities to both credit reports and employment background checks in addition to credit, factors include prior rental payment history, lawsuits involving that tenant and landlord 17

20 Standard for Consumer Reports Maximum Possible Accuracy Accordingly, Congress created FCRA to implement an especially high standard of accuracy -- Maximum Possible Accuracy Accuracy is the Hallmark and starting place for most claims under FCRA 18

21 A System with Widespread Errors How Widespread is it? Millions of consumers have substantial errors on their credit reports. FTC study of the credit reporting industry concluded: One in four (25%) consumers identified errors on their credit One in 20 (5%) of consumers had errors serious enough to cause they to pay more for credit. After Disputes: One in five consumers had an error that was corrected by a credit reporting agency (CRA) after it was disputed, on at least one of their three credit reports Slightly more than one in 10 consumers saw a change in their credit score after the CRAs modified errors on their credit report 19

22 Why Don't CRAs Just Get it Right? Overinclusion no system is perfect either underinclusive or overinclusive CRAs choose overinclusive. Why? because their customers are the banks and other potential creditors. those customers want a better-safe than sorry approach. How do they accomplish overinclusiveness? use loose identifiers one example: 7 of 9 digits on SSN is a match 20

23 Recognizing the FCRA 21 A credit pull was done A background check was made Client has a Credit Report A high interest loan was made A loan was denied A job was denied Simply anything included in a consumer s financial reputation that is untrue! 21

24 Time Out to Review At this point, let's pause and review what we have considered so far: Consumer reports affect almost every consumer, usually in multiple arenas FCRA holds those reports to a very high level accuracy Inaccuracies, that cause credit scores to appear lower than they are, are rampant Creditors make more money from consumers with a negative credit rating, especially if that negative rating does not reflect an actually higher lending risk. Putting that all together: There is a need in the community. These cases are all around you. 22

25 Litigating Inaccuracies No Strict Liability for Accuracy in other words, mere fact that there is an inaccuracy does not equal liability the issue always is reasonableness of procedures to ensure used to ensure accuracy Reasonableness of Procedures arises in two instances: 1. reasonable procedures to ensure maximum possible accuracy was not reported (CRA only) 2. after a consumer disputes an error, reasonableness of investigation of that dispute (both CRA and Furnisher) More about disputes and accuracy later... 23

26 Players in the Consumer Reporting Game Creditor #1 Pot. Creditor #2 Potential creditor requests report from CRA Consumer CRA 24

27 Players in the Consumer Reporting Game Consumer Reporting Agencies (CRAs) Consumer Reporting Agency any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports. 1681a(f). 3 national CRAs: Equifax, Experian, and TransUnion sometimes referred to as: credit bureaus credit reporting agency a consumer reporting agency that regularly engages in the practice of assembling or evaluating, and maintaining, for the purpose of furnishing consumer reports to third parties bearing on a consumer s credit worthiness, credit standing, or credit capacity, each of the following regarding consumers residing nationwide. 1681a(p). 25

28 Players in the Consumer Reporting Game National Speciality CRAs nationwide specialty consumer reporting agency means a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis relating to-- (1) medical records or payments; (2) residential or tenant history; (3) check writing history; (4) employment history; or (5) insurance claims. 1681a(x). For more information: List of Speciality CRAs: onsumer-reporting-agencies.pdf Account Screening CRAs: ening%20cra%20agencies%20banking%20access % 20report.pdf 26

29 Players in the Consumer Reporting Game Furnishers of Information: Who reports "furnishers" are Original creditors (Creditor #1 in graph above) Third party debt collectors Resellers of public record information (like Lexis Nexis) Past landlords Why report? low cost collection tool subscriber agreement may obligate 27

30 Users of Consumer Reports: Who buys reports and why? potential creditors, employers, banks, and landlords (Creditor #2 in graph above) permissible purposes for a CRA to furnish a consumer report to a user 1681b(a) when a user "pulls" a report without a permissible purpose, there may be a claim for an "impermissible pull" hard "pulls" for credit -- usually when consumer authorizes it in conjunction with an application for credit these lower credit scores because it shows that the person is in need of credit and lacks sufficient resources at the time soft "pulls" for credit do not lower credit scores one example: credit card bank inquires about a consumer's credit score to assess whether to offer a preapproved credit card 28

31 Private Causes of Action Pursuant to FCRA Liability: Determine the Source of the Problem to Assess Appropriate Statutory Provision for Liability Refresher: Hallmark of an FCRA claim is inaccurate information That inaccurate information may originate either with a CRA or a Furnisher 29

32 Private Causes of Action Pursuant to FCRA Inaccurate Information Originating with the CRA Accuracy of report. Whenever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates. 1681e(b). Nothing here about a dispute. 1681e(b) obligation on CRAs exists without regard to any dispute. 30

33 Private Causes of Action Pursuant to FCRA Typical Problems Mixed File one consumer has info on his report belonging to another Merged File took consumers with separate files and merged them onto one single file. Frank and John are now one entity Multiple Files consumer has multiple files Entity to Sue & Statute Violated CRA 15 U.S.C. 1681e(b) failure to follow reasonable procedures to assure maximum possible accuracy 31

34 Private Causes of Action Pursuant to FCRA Inaccurate Information Originating with the Furnisher CRA's Obligations: 1681i(a)(1)(A): Subject to subsection (f), if the completeness or accuracy of any item of information contained in a consumer s file at a consumer reporting agency is disputed by the consumer and the consumer notifies the agency directly, or indirectly through a reseller, of such dispute, the agency shall, free of charge, conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate and record the current status of the disputed information, or delete the item from the file in accordance with paragraph (5), before the end of the 30-day period beginning on the date on which the agency receives the notice of the dispute from the consumer or reseller. 1681i(a)(2)(A): Before the expiration of the 5-business-day period beginning on the date on which a consumer reporting agency receives notice of a dispute from any consumer or a reseller in accordance with paragraph (1), the agency shall provide notification of the dispute to any person who provided any item of information in dispute, at the address and in the manner established with the person. 32

35 Private Causes of Action Pursuant to FCRA Furnisher's Obligation: 1681s-2(b) Duties of Furnishers of Information upon Notice of Dispute (1). After receiving notice pursuant to section 611(a)(2) [ 1681i] of a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall (A) conduct an investigation with respect to the disputed information; (B) review all relevant information provided by the consumer reporting agency pursuant to section 611(a)(2) [ 1681i]; (C) report the results of the investigation to the consumer reporting agency; (D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other consumer reporting agencies to which the person furnished the information and that compile and maintain files on consumers on a nationwide basis; and (E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1), for purposes of reporting to a consumer reporting agency only, as appropriate, based on the results of the reinvestigation promptly (i) modify that item of information; (ii) delete that item of information; or (iii) permanently block the reporting of that item of information 33

36 Problems Originating with Furnisher Typical Problems (here, possibilities are endless) Entity to Sue and Statute Violated reporting of non-existent debt altogether debt never incurred debt incurred by another person (family) inaccurate date of first delinquency inaccurate amount of debt owed failure to mark as paid failure to mark as disputed * incomplete information technically accurate but misleading because incomplete (such as reporting that sent to collections but failing to report that has been paid in full) bankruptcy -- continuing to report details about the discharged debt rather than simply reporting "discharged in bankruptcy" medical information -- may not report facts that disclose private medical information Identity theft Dispute process requires: reasonable reinvestigation parroting or automated verification not sufficient o must conduct searching inquiry Once dispute made with CRA: CRA [15 U.S.C. 1681i] CRA s list of duties during reinvestigation process Furnisher [15 U.S.C. 1681s-2(b)] Furnisher s list of duties during reinvestigation process 34

37 Private Causes of Action Pursuant to FCRA Furnisher (Creditor) Choose Wisely: The FCRA Dispute Triangle (a.k.a. The Rabbit Hole) Consumer Valid Dispute: Consumer Disputes Directly with CRA and CRA Transmits Creditor s Response to Consumer CRA 35

38 Private Causes of Action Pursuant to FCRA CRITICAL POINT: There is NO private cause of action against a furnisher unless and until 30 days after a dispute is filed with a credit bureau What Actually Happens in a Dispute? CRA reduces dispute to a code according to the METRO 2 guidelines That code is transmitted to furnisher via E-OSCAR system Furnisher typically does a cursory review to confirm that the information being reported is the same as what furnisher intended to report essentially parroting back the information to CRA case after case has held that this is not a reasonable reinvestigation 36

39 Damages Actual Damages pecuniary damages examples: paying more for mortgage losing job offer and resulting lost wages non-pecuniary damages emotional distress need not corroborate with medical evidence consumer's family/friends may testify causation remains a requirement the error must be shown to have caused the damage thus, causation may not exist where consumer has accurate negative information Defendant will argue that, even if it violated statute, consumer's credit score was already damaged and consumer would have suffered credit denials regardless 37

40 Damages Statutory Damages (in the alternative to actual damages) Spokeo, Inc. v. Robins, No (cert. granted, April 27, 2015) whether a plaintiff who cannot show any actual harm from a violation of the Fair Credit Reporting Act (FCRA) nevertheless has standing under Article III of the U.S. Constitution to sue for statutory damages in federal court Reversing the district court, the U.S. Court of Appeals for the Ninth Circuit ruled that the defendant s alleged violation of the plaintiff s FCRA statutory rights established an injury sufficient to satisfy Article III. According to the Ninth Circuit, because the FCRA does not require proof of actual damages when a plaintiff sues for willful violations, a plaintiff s statutory FCRA rights can be violated without the plaintiff suffering any actual damages. The court concluded that it was constitutionally permissible for Congress to treat violations of such rights as concrete, de facto injuries and elevate such injuries to the status of legally cognizable injuries. 38

41 Damages Attorney's Fees wrongdoer pays Plaintiff's fees lodestar method Attorney s fees can and sometimes do exceed the consumer s recovery This allows small violations to be vigorously prosecuted 39

42 Damages Punitive Damages willful misconduct even reckless misconduct. See Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007) 40

43 Employment Background checks Just like credit reports, inaccuracy is also the hallmark of employment background checks claims Common examples: wrong criminal history (same or similar name) misdemeanor vs. felony expungements 41

44 Employment Background checks Proper Procedure Purpose obtain written consent by job applicant 1681b(b)(2): Disclosure to Consumer Must provide "a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes"; and ensure applicant has an opportunity to dispute any erroneous information in report before employer takes adverse action based upon that report 1681b(b): Conditions for Furnishing and Using Consumer Reports for Employment 1681b(b)(3): Pre-Adverse Action Notice in using a consumer report for employment purposes, before taking any adverse action based in whole or in part on the report, the person intending to take such adverse action shall provide to the consumer to whom the report relates (i) a copy of the report; and (ii) a description in writing of the rights of the consumer under this title class action potential 42

45 What to worry about: 43 Attorney Fees Levine v. JPMorgan Chase & Co., No. 13-C-498, 2014 WL (E.D. Wis. Sept. 5, 2014) Your client s relatives Anthony v. Equifax Info. Servs., LLC, No. 2:13-CV TLN, 2015 WL (E.D. Cal. Feb. 5, 2015) Credit Repair Organizations Act Prohibiting taking money for a promise to fix credit. 15 U.S. Code 1679b(b) 43

46 Consumer Repair Companies 44 What they do: File numerous disputes with the CRAs Spam Disputes (Filing numerous disputes back to back) Take advantage of the 30 day rule Often get items deleted The downside: Often temporary Tradelines often reinserted from other CRAs Can get consumer banned from making disputes 44

47 Why isn t the FCRA used? 45 Wrongfully sued focusing on the suing party Identity theft focusing on the thief Declined employment focusing on wrongful behavior of the employer Declined loan focusing on the party that has reported the wrong information Debt collection focusing on the creditor who is trying to collect money from your client 45

48 Thank You and Contact Me with Questions. Michael Rapp Stecklein & Rapp Chartered 748 Ann Ave Kansas City, KS T: E: E: L: L: 46