Tuesday, May 18, 2010

Finding Guidance In Gorman: Examining A Furnisher’s Duty To Report Complete And Accurate Information And The Duty To Investigate Consumer Disputes

The Ninth Circuit’s decision in Gorman v. Wolpoff & Abramson, 584 F.3d 1147 (9th Cir. 2009) probably triggered more than a few groans from collectors who furnish information to consumer reporting agencies. In Gorman, the Ninth Circuit recognized a new cause of action arising under California law based upon a furnisher’s failure to report complete and accurate information. Although furnishers have always had this duty, which is established by section 1785.25(a) of the California Civil Code, previous decisions had held that consumer claims arising under the state statute were preempted by the Fair Credit Reporting Act.

Gorman thus adds another potential claim that can be asserted by California consumers against collectors who furnish information about their accounts. If there is a silver lining to Gorman, however, it is that the case provides furnishers with a reminder of the importance of the need to ensure they are reporting complete and accurate information, and some guidance on how they should handle disputes about the information they report.

In Gorman, the Court held, inter alia, that a consumer can pursue a private right of action, under section 1785.25(a) of the California Civil Code, against a furnisher who reports inaccurate or incomplete information to a consumer reporting agency. The consumer can also seek actual damages, punitive damages, attorney’s fees and injunctive relief, and can seek to pursue claims on behalf of a class of consumers, under sections 1785.25(g) and 1785.31 of the Code. See Gorman, 584 F. 3d at 1170-73. Although these Civil Code sections had been on the books for decades, they had not given rise to many claims against the collection industry, because a line of district court cases had held that the Fair Credit Reporting Act preempted the damage provisions found at sections 1785.25(g) and 1785.31 of the Civil Code. See, e.g., Lin v. Universal Card Services Corp., 238 F. Supp. 2d 1147 (N.D. Cal. 2002).

Furnishers already have a duty, arising under both federal and state law, to ensure that they submit accurate and complete information to consumer reporting agencies. See 15 U.S.C. § 1681s-2(a); Cal. Civ. Code § 1785.25(a). But courts have recognized that consumers cannot pursue damage claims under federal law for alleged violations of section 1681s-2(a) of the FCRA. Thus, the Gorman decision recognized a “new” cause of action against furnishers. Under Gorman, a consumer can now sue the furnisher under state law where the furnisher has submitted information “on a specific transaction or experience to any consumer credit reporting agency” if the consumer proves the furnisher “knows or should know the information is incomplete or inaccurate.” See Cal. Civ. Code § 1785.25(a).

All of this may sound depressing, but the good news is, there is likely nothing new that a furnisher needs to do in order to comply with Gorman. Furnishers should already have in place procedures for ensuring that the information they report is complete and accurate, consistent with their obligations under 16 C.F.R. § 660.3 (effective July 1, 2010). The federal agencies have published guidelines that furnishers must consider when developing policies and procedures to ensure the “accuracy” and “integrity” of the information they furnish, and the guidelines are designed to be flexible in order to reflect “the nature, size, complexity, and scope of the furnisher's activities.” See 16 C.F.R. Pt. 660, App A.

Thus, a furnisher who is complying with federal law should have no trouble defeating a claim asserted under section 1785.25(a) of the Civil Code. In fact, the Civil Code includes a defense, similar to the “bona fide error” defense in the FDCPA, which provides that the furnisher will not be liable if it “establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.” See Cal. Civ. Code § 1785.25(g).

The Gorman case also provides some helpful guidance on how furnishers should go about investigating disputes they receive from consumers through the consumer reporting agencies. Most furnishers know that they must conduct a reasonable investigation of these disputes, but it is not always easy to determine exactly what you need to do in order to discharge your duty of investigation. Do you have the right procedures in place?

Although the reasonableness of furnisher’s investigation under section 1681s-2(b) of the FCRA would appear to be a question of fact, the Gorman court held that an investigation can be reasonable as a matter of law. See Gorman, 584 F.3d at 1157 (“Summary judgment is not precluded altogether on questions of reasonableness. It is appropriate when only one conclusion about the conduct's reasonableness is possible.”) (citations and quotation marks omitted).

A review of the holding in Gorman reveals some basic steps that a furnisher should follow to ensure that the investigation process is reasonable. A furnisher should:

1) individually review each dispute received from a consumer reporting agency,
2) analyze all information in its possession bearing on the dispute, and
3) update all the reporting on the account as appropriate.

A furnisher should not believe that it can conduct a reasonable investigation by treating every dispute in an identical fashion. Most furnishers receive electronic notice of disputes from consumer reporting agencies through the E-Oscar system. The description of the dispute is often cryptic, and is typically described using one or more standardized dispute codes. One of the disputes received by MBNA in the Gorman case simply stated “Claims Company Will Change” and nothing more. See Gorman, 584 F.3d at 1158. Even if the description of the dispute is sparse, however, the investigation conducted by the furnisher must be reasonable. A “superficial” investigation will not do; rather, a “fairly searching inquiry” is required. Id. at 1156.

Furnishers should read each ACDV carefully, because the scope of the duty to investigate under section 1681s-2(b) of the FCRA is delineated by the description of the dispute received from the consumer reporting agency. In addition to the standard dispute codes, ACDVs typically have a space entitled “FCRA Relevant Information,” which can be used to further describe the dispute. All sections of the ACDV should be read carefully. As the Gorman court noted,

[T]he reasonableness of the furnisher's investigation is measured by its response to the specific information provided by the CRA in the notice of dispute. The pertinent question is thus whether the furnisher's procedures were reasonable in light of what it learned about the dispute from the description in the CRA's notice of dispute.

Gorman, 584 F.3d at 1157 (citation omitted).

After the dispute has been reviewed, the furnisher must have in place a procedure for reviewing all information in its possession which might bear upon the dispute. Consumers often argue that a furnisher must go beyond a review the information contained in its own files. To date, however, no circuit court has extended the duty of investigation that far. For example, in Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005), the consumer argued the furnisher’s investigation was unreasonable because it never contacted the consumer directly. The Seventh Circuit rejected this, noting that “requiring a furnisher to contact every consumer who disputes a debt would be terribly inefficient and such action is not mandated by the FCRA.” Id. at 827.

Similarly, in Gorman, the consumer argued that MBNA’s investigation was unreasonable, because the bank had not contacted the merchant or the consumer, and had relied solely upon its internal account records. Gorman, 584 F. 3d at 1160. The Ninth Circuit noted that MBNA had properly consulted “the relevant information in its possession.” Id. at 1161. The bank reviewed its account notes, which showed it had previously investigated and rejected Gorman’s dispute. Id. The bank was not required to reinvestigate the dispute, particularly since no new information had been supplied by the consumer. The Court observed:

Congress could not have intended to place a burden on furnishers continually to reinvestigate a particular transaction, without any new information or other reason to doubt the result of the earlier investigation, every time the consumer disputes again the transaction with a CRA because the investigation was not resolved in his favor.

Id. at 1160.

If the furnisher does not even bother to review data in its own files which might bear on the dispute, however, the review will be deemed unreasonable. For example, in Johnson v. MBNA America Bank, 357 F.3d 426 (4th Cir. 2004), a woman disputed an MBNA account that appeared on her credit report. The dispute stated “consumer states belongs to husband only ... was never a signer on account. Was an authorized user.” Id. at 429. In response, MBNA reviewed its electronic notes, but did not attempt to ascertain if it still had records reflecting whether the plaintiff was a co-obligor on the account. The court upheld a jury’s finding that this investigation was unreasonable. Id. at 431.

Once the investigation is complete, the furnisher must review the information it is furnishing and make any appropriate updates to its reporting to the consumer reporting agency. See 15 U.S.C. § 1681s-2(b)(1). Thus a furnisher’s procedures should include steps to ensure that any new information uncovered by the investigation is reflected in future reporting. This does not mean that the furnisher must always agree with the consumer, or that you will automatically violates the FCRA if the updated information turns out to be wrong. See Gorman, 584 F.2d at 1161 (“An investigation is not necessarily unreasonable because it results in a substantive conclusion unfavorable to the consumer, even if that conclusion turns out to be inaccurate.”). But furnishers should be sure to review all information they are reporting on the account for accuracy. Continuing to report information about an account that is “materially misleading” – i.e., information that could have an “adverse effect” on credit decisions relating to the consumer – can support a claim under section 1681s-2(b) of the FCRA. Id. at 1163.

The Gorman decision recognizes a “new” cause of action for consumers, arising under section 1785.25(a) of the California Civil Code. But the case does not impose a new set of legal duties on furnishers. Furnishers have always had a responsibility under federal and state law to maintain procedures designed to ensure that the information they furnish to consumer reporting agencies is complete and accurate. As of July 2010, federal law mandates that furnishers must maintain written policies and procedures which explain how they will ensure the accuracy and integrity of the data that they submit. Thus, furnishers who continue to comply with their existing obligations should have much trouble in defeating the consumer claims that they may encounter under section 1785.25(a).

To comply with the duty of investigation under section 1681s-2(b) of the FCRA, and consistent with the Gorman decision, furnishers should establish procedures (preferably in writing) setting forth how each dispute received from a consumer reporting agency will be reviewed. Employees must be trained on how to read and understand all standard dispute codes used by the consumer reporting agencies, and to evaluate any additional “FCRA Relevant Information” that is supplied. All of the information in the furnisher’s files that might bear upon the dispute must be reviewed. Once the investigation is complete, all information that is being reported by the furnisher should be reviewed, and updated as appropriate.

[Note: This post reflects an article authored by Tomio Narita that originally appeared in the May/June 2010 Edition of "Collector's Ink" Magazine]

A copy of the full text of the Fair Credit Reporting Act as published by the Federal Trade Commission can be viewed and downloaded here:

FTC's.Complete.Text.of.FCRA.July.2009 -


1. Section 1785.25(a) of the California Civil Code provides: “A person shall not furnish information on a specific transaction or experience to any consumer credit reporting agency if the person knows or should know the information is incomplete or inaccurate.”

2. Section 1785.25(g) of the California Civil Code provides: “A person who furnishes information to a consumer credit reporting agency is liable for failure to comply with this section, unless the furnisher establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.”

3. Section 1785.31 of the California Civil Code provides that any consumer who suffers damages as a result of a violation of the title may seek actual damages for negligent violations (including court costs, loss of wages, attorney’s fees and pain and suffering), and in the case of wilful violations, may also seek punitive damages of not less than one hundred dollars ($100) and not more than five thousand dollars ($5,000) for each violation as the court deems proper. Consumers may also seek injunctive relief and may assert their claims in a class action.

4. The Ninth Circuit has held that there is no private right of action for breach of the duties set forth in section 1681s-2(a) of the FCRA, which includes the duty to furnish accurate information to consumer reporting agencies. See Nelson v. Chase Manhattan Mortgage Corp., 282 F.3d 1057, 1059-60 (9th Cir. 2002).

5. Section 1681s-2(b) of the FCRA provides that, after receiving a notice of dispute, the furnisher shall: (A) conduct an investigation with respect to the disputed information; (B) review all relevant information provided by the [CRA] pursuant to section 1681i(a)(2) ...;(C) report the results of the investigation to the [CRA]; (D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other [CRAs] to which the person furnished the information ...; 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) ... (i) modify ... (ii) delete[or] (iii) permanently block the reporting of that item of information [to the CRAs]. 15 U.S.C. § 1681s-2(b).