Protecting Your Institution from Fair Credit Reporting Act Litigation
The article was originally published by ABA Bank Compliance in May-June 2018.
In everyday language, “frivolous” is defined as “silly” and “not having any serious purpose or value.” The legal definition of “frivolous” is “lacking in any arguable basis or merit in either law or fact.” Most defendants in litigation would characterize a lawsuit against them as “frivolous,” but the word is probably used a little too loosely, as many lawsuits likely do have some arguable basis or merit in law or fact, even if tenuous. In my time of practice over the last decade and a half, financial institutions seem to be disproportionally more likely to be the victims of an actually frivolous lawsuit. In recent years, there has been an uptick in meritless, frivolous claims brought by plaintiffs against financial institutions pursuant to numerous consumer protection statutes such as the Fair Debt Collection Practices Act (“FDCPA”), the Telephone Consumer Protection Act (“TCPA”), the Fair Credit Reporting Act (“FCRA”), and many others.
In fact, U.S. District judge Bomb from the District of New Jersey recently noted, “This Court is not naïve to the fact that FCRA litigation and its cousin Fair Debt Collection Practices Act (FDCPA) litigation are often pursued on boilerplate pleadings with no ultimate intent or hope that the case proceeds to trial or much past the pleadings stage.” These statutes, for the most part, allow relatively low damages claims for a plaintiff, but they include a right to attorneys’ fees for a prevailing plaintiff. It is usually more economical for the financial institution to pay a settlement in these types of claims than to litigate the merits of a frivolous claim. These settlements add up, though, and a few hundred or thousand dollars in nuisance claims adds up to hundreds of thousands of dollars in settlements of frivolous claims. This article will discuss how your institution can try to protect itself from FCRA claims and could also cause reputational risk..
Understanding the FCRA and When Claims Have Merit
The FCRA is a federal law whose primary either knowingly or recklessly violated purpose is to protect consumers. Consumer information has become a valuable commodity and is sought after by lenders, employers, insurance companies and credit sellers, to name a few. Accuracy and completeness of consumer reports is vital to both the individual and the economy. The FCRA regulates both consumer reporting agencies (“CRAs”)—the entities that gather and store information on individuals and sell it to those who need it; and “furnishers”—those entities who provide information to CRAs. The statute also regulates users of consumer information, such as those who pull a consumer report to evaluate a consumer’s credit, but this article does not discuss that aspect of the FCRA. This article also does not discuss the FCRA provisions dealing with employers’ liability.
The FCRA provides a range of remedies for violations, including actual, statutory, and punitive damages, as well as reasonable attorneys’ fees. Statutory damages are available in the range amount of $100 to $1,000, but the plaintiff must show that the violation was willful to obtain statutory damages. A willful violation is where the defendant either knowingly or recklessly violated the statute. Actual damages are available for any negligent FCRA violation. In determining whether there was a negligent violation, courts look at whether the defendant acted reasonably, and the consumer must show a causal relationship between the FCRA violation and the harm, such as a loss of credit.
The Furnisher Rule, which affects financial institutions, requires furnishers to: (1) furnish information that is complete and accurate; and (2) investigate consumer disputes about the accuracy of the information they provide. Seems simple enough, right? In reporting a consumer’s credit information, your institution need only make sure the information being reported is complete and accurate; and, if the consumer complains that the information is not correct, your institution needs to investigate whether the information is accurate and correct the consumer’s information if it is not.
The Consumer Financial Protection Bureau (Bureau) has recognized that most furnishers fail to:
- Notify consumers of investigation results of direct disputes.
- Properly train employees who oversee furnishing.
- Establish and implement written policies and procedures as to the accuracy and integrity of the information being reported.
- Periodically review and update policies and procedures.
There is no way to stop frivolous claims. There never will be. But, in my opinion, an institution can protect against being a victim of frivolous claims by being proactive, diligent and observant. Lawsuits often result from sloppy practices or preventable mistakes by employees. These actions, while likely not violations of the law per se, look bad and end up being the subject of lawsuits. Below are some tips to protect your institution.
Is Your Institution Keeping up with the Law?
Since 2009, the FCRA has become more heavily litigated, which has made for new and expanded interpretations of the law. The law—or the interpretation of the law—changes and expands at a rapid pace in the area of consumer protection. Further, since 2009, the Bureau has become more empowered, and it has become more focused and determined that furnishers of information should be subject to more scrutiny.
It is imperative to make sure that your institution’s credit reporting practices are still correct and current. Importantly, make sure your employees have adequate training on how to comply with the changes to the FCRA. If you do not already, have someone designated to watch for Bureau bulletins, reports and advisories that may affect your institution. Also, designate someone to monitor changes or updates to credit reporting formats. If you do not stay apprised of the changes, it is easy to fall prey to litigation.
Get the Reporting and Investigation Right
There are only two things you need to do as a furnisher. Report accurate information and investigate claims that information is not accurate. How hard can that be? Really hard, based on the amount of litigation that exists.
Civil litigation is triggered by the second prong of the furnisher test, conducting the investigation, as there is no private right of action for initially reporting inaccurate information. Civil liability comes into play when the consumer or the CRA notifies you that there is a dispute as to the accuracy of the information being reported and the institution fails to adequately investigate the dispute.
A “reasonable investigation” is not defined in the statute or rules, but the Bureau has stated that it considers an investigation to be reasonable when the furnisher has reviewed and considered “all relevant information relating to the dispute, including documents that the CRA includes with the notice of dispute it transmits during the investigation and the furnisher’s own information with respect to the dispute.” Courts have found that it can be unreasonable for a furnisher not to consult the underlying documents when verifying that information is accurately reported. Thus, it is very important that your employees are properly trained on how to investigate a dispute and that they actually move forward with investigating the dispute.
Implementing Policies and Following Procedures Under the FCRA
Policies and procedures are always important, especially under the FCRA, because the Furnisher Rule requires a furnisher to establish and implement written policies and procedures regarding the accuracy and integrity of the information being furnished to the CRA. The policies and procedures should include:
- Procedures to ensure that information is checked and substantiated by your records when it is received.
- Training of staff on the investigation process.
- Monitoring for compliance with applicable laws and regulations and auditing operations for adherence to governing policies and procedures.
- Monitoring and overseeing vendors involved in providing products and services.
- Requiring maintenance of records for a reasonable time.
- Preventing re-aging and duplicate reporting.
Do you have business unit monitoring processes as well as comprehensive audits in place to make sure your policies and procedures are adequate and are being implemented? Are those policies and procedures up to date? Are all of your employees trained and following the policies and procedures? Are your vendors aware of your policies and procedures? If the answer to any of these questions is no, your institution could be at risk for regulatory or litigation actions.
FCRA litigation, whether frivolous or not, is here to stay and your institution must be prepared to comply with the highly technical FCRA requirements. Failure to do so exposes the institution to civil liability, including class actions and regulatory attention by the Bureau and/or your prudential Federal Regulatory authority, and the Federal Trade Commission.