FCRA and the CARES Act: Putting in Right Procedures Now, Reducing Volume of Litigation Later
Kavita Shelat; Linda Finley
Kavita Shelat is a member of Baker Donelson’s Financial Services Group in Memphis. She assists bank clients with legal and regulatory issues, including residential mortgage litigation, commercial loan litigation and compliance with federal consumer financial protection statutes such as ECOA, FCRA, RESPA, TILA, FDCPA and TCPA. She can be reached at firstname.lastname@example.org.
A shareholder in Baker Donelson’s Atlanta office, Linda Finley represents and defends mortgage lending and servicing clients in litigation concerning residential mortgage transactions, including lending liability, state and federal regulatory compliance and real estate title issues. She can be reached at email@example.com.
Over the past 10 years, Fair Credit Reporting Act lawsuits have nearly quadrupled from some 1,350 cases in 2010 to 5,000 in 2019. FCRA allows plaintiffs to recover attorney fees, which may explain the increase.
Just as the mortgage crisis of 2008 led to an explosion of litigation that lasted several years, so, too, will widespread economic hardship in response to COVID-19 lead to increased litigation. Fortunately, creditors and servicers have learned lessons from the last crisis and are proactively working with consumers on payment accommodations.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) amends FCRA so that when a financial institution offers a payment accommodation to a consumer affected by COVID-19, and the consumer performs its obligations under the accommodation, the financial institution must report the account as current to credit reporting agencies. Understanding the change to FCRA and putting the right compliance procedures in place now will help institutions reduce the volume of FCRA litigation later.
Changes in How to Furnish Information About Loan Assistance
FCRA at 15 U.S.C. §1681s-2 is entitled “Responsibilities of furnishers of information to consumer reporting agencies” and now includes a new subsection at §1681s-2(a)(1)(F) entitled “Reporting information during COVID-19 pandemic.” The new subsection sets out that if a financial institution offers any of the following “accommodations” to a consumer affected by the COVID-19 pandemic:
1) deferring one or more payments;
2) accepting partial payments;
3) forbearing on delinquent amounts;
4) modifying a loan; or
5) providing any other assistance or relief
and the consumer makes one or more payments under the accommodation (or is not required to make payments), then the financial institution must furnish that the account is current to the credit reporting agencies. Only if an account is already delinquent before an accommodation is made may the financial institution continue to furnish that the account is delinquent. Once the consumer brings the account current, moreover, the financial institution must furnish that the account is current. See §1681s-2(a)(1)(F)(I) and (ii).
This provision poses two issues for financial institutions to address. First, financial institutions must grapple with how to furnish information about consumers who default on their obligations under an accommodation–for example, a consumer who makes some of the required partial payments, but not all of them. Should the financial institution furnish information as if the delinquency is recent, or furnish information to reflect the full extent of the delinquency? The most practical, general advice on this issue is to 1) implement consistent procedures for all consumers with this fact-pattern; and 2) communicate with consumers on the front end about how the accommodation (and any default under the accommodation) will be furnished to credit reporting agencies.
Second, financial institutions must develop parallel tracking systems for loan delinquency levels for purposes of regulatory review–one tracking system that comports with the changes to FCRA and one tracking system that captures the true level of delinquency in a loan portfolio.
Some Good News on Liability and Federal Regulatory Reassurance
First piece of good news–remember that FCRA does not provide consumers with a private right of action to bring claims related to the initial accuracy of information furnished to credit reporting agencies. See 15 U.S.C. § 1681s-2(c)(1). Instead, a consumer first must dispute the accuracy of any information that appears on their credit report through the credit reporting agency. The reporting agency, in turn, will give the financial institution the opportunity to investigate and correct any errors. If a financial institution fails to conduct a reasonable investigation into a consumer’s dispute, then the financial institution could be subject to FCRA liability. See 15 U.S.C. § 1681s-2(c)(1).
Second piece of good news–the Consumer Financial Protection Bureau has made clear it wants financial institutions to work with affected consumers and provided regulatory relief and reassurance in three areas. In its April 1 policy statement, the CFPB stated that it does not intend to cite in examinations or take enforcement actions against those financial institutions that provide accommodations to consumers but furnish information to credit reporting agencies that an account is not current.
The CFPB also recognized that financial institutions would be serving increased consumer need while operating under physical distancing conditions, and therefore, the CFPB does not intend to cite in an examination or bring an enforcement action against a financial institution making good faith efforts to investigate consumer disputes as quickly as possible, even if the dispute investigations take longer than the timeframes set out in the FCRA statute.
Finally, the CFPB anticipates that financial institutions may see an increase in frivolous consumer disputes about credit reporting and encourages financial institutions to take advantage of existing statutory provisions that eliminate the obligation to investigate disputes that are reasonably determined to be frivolous or irrelevant.
Some Bad News on State Enforcement and Private Litigation
The bad news is that although the CFPB’s April 1 policy statement provided that the Bureau would step back from enforcing certain requirements of FCRA as amended by the CARES Act, several state Attorneys General are not so forgiving. On April 13, in response to the CFPB’s April 1 guidance, AGs from 21 states and D.C. directed a letter to the CFPB requesting that it withdraw its April 1 guidance insofar as the guidance limited the CFPB’s action. To strengthen their position, on April 28 those AGs directed a letter to the major credit reporting agencies stating that they expected compliance with the new FCRA provisions and that compliance of the provisions would be actively monitored and enforced.
While state-level scrutiny of compliance will vary across states, one constant is that FCRA private litigation will increase in every state. In fact, even if financial institutions implement effective procedures for approving and implementing accommodations, and even if financial institutions communicate the terms and consequences to their consumers, private litigation will increase for two reasons. First, mistakes will happen. Second, some consumers use litigation out of desperation–to buy time or to get further assistance.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)