Tuesday, May 6, 2014

Is The CFBP's Position On Credit Reporting Statements Consistent With The Case Law?


     The CFPB does not want debt collectors to tell consumers that paying their debts might help them to improve their credit score.  Nor does the CFPB want collectors to encourage consumers to pay by informing them that their failure to do so might harm their credit.  The Bureau made this point crystal clear in the Bulletin that it issued in July 2013 entitled “Representations Regarding Effect of Debt Payments on Credit Reports and Scores” where it claimed that making such statements might amount to a deceptive act or practice in violation of the FDCPA and the Dodd-Frank Act.  But is the CFPB’s position on this point consistent with case law on this subject?  Not really.  It turns out that courts from around the country have repeatedly recognized that collectors can, and perhaps should, seek to encourage consumers to pay their debts by informing of them of the potential impact on their credit.

             Before diving in to the discussion, consider some context on credit reporting provided to us by Congress. As part of the Fair Credit Reporting Act, Congress mandates that certain furnishers of information must provide consumers with a “clear and conspicuous” written notice that negative information is being reported about them to the consumer reporting agencies.  See 15 U.S.C. §§ 1681s-2(a)(7)(A)(i), 1681s-2(a)(7)(C)(ii).  In fact, the CFPB is responsible for formulating a model disclosure that furnishers can use to provide the notice of negative credit reporting.  Id. at § 1681s-2(a)(7)(D). Thus, Congress has already determined that it is important for consumers to be informed about negative information that is being furnished about them, and the CFPB is in charge of crafting a model notice so furnishers can get the word out to consumers.

            In its Bulletin issued in July 2013, the CFPB took the position that creditors, debt buyers and third-party collectors often make representations to consumers about credit-related issues in order to persuade them to pay.  These include statements suggesting that paying their debts might improve their credit report, their credit score, or their creditworthiness, or that payments may increase the likelihood that the consumer will receive credit or more favorable credit terms.  The Bureau pointed out that consumers often “view credit reporting as an important determinant of their future access to credit and other opportunities” and that representations made by collectors about credit “may be deceptive under the FDCPA, the Dodd-Frank Act, or both.”  According to the CFPB, “in light of the numerous factors that influence an individual consumer’s credit score” payments made to a collector or creditor “may not improve the credit score of the consumer to whom the representation is being made.”  In addition, given the “variety of sources of information to assess the creditworthiness of prospective borrowers,” the Bureau asserted that “debt collectors may well deceive consumers if they make representations about the nature or extent of improved creditworthiness that result from paying debts in collection.”  For these reasons, the CFPB outlined its expectation that “debt collectors should take steps to ensure that any claims that they make about the effect of paying debts in collection on consumers’ credit reports, credit scores, and creditworthiness are not deceptive” and the Bureau made it clear that it would be looking at these issues closely in connection with its supervision activities and enforcement investigations.

            The CFPB’s position, however, appears to be directly at odds with decisions issued over the past few decades by courts from around the country.  Courts at both the circuit court level and the district court level have repeatedly recognized that when consumers pay their debts, this is likely to improve their credit.  The courts have also held that collectors can, and probably should, remind consumers of this fact in order to encourage them to pay.  

             For example, the Ninth Circuit recognized that a collector could “properly” notify a consumer that nonpayment of a debt “could adversely affect her credit reputation” in Wade v. Regional Credit Ass’n., 87 F.3d 1098 (9th Cir. 1996).  There, the collector sent a letter stating “if not paid TODAY, it may STOP YOU FROM OBTAINING credit TOMORROW.  PROTECT YOUR CREDIT REPUTATION.  SEND PAYMENT TODAY . . . DO NOT DISREGARD THIS NOTICE.  YOUR CREDIT REPUTATION MAY BE ADVERSELY EFFECTED.”  Id. at 1099.  The Ninth Circuit rejected the consumer’s claim that the letter violated sections 1692e, 1692e(5) and 1692e(10) of the FDCPA, noting that: “The body of the notice was informational, notifying Wade that failure to pay could adversely affect her credit reputation… .The least sophisticated debtor would construe the notice as a prudential reminder, not as a threat to take action. . .The notice told Wade correctly that she had an unpaid debt, and properly informed her that failure to pay might adversely affect her credit reputation.” Id. at 1100.

             Similarly, the Seventh Circuit observed that it was entirely proper for the collector to “encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay” in Durkin v. Equifax Check Services, Inc., 406 F.3d 410, 418 (7th Cir. 2005).  There, the collector’s letter told the consumer that “CONTINUED REFUSAL TO HONOR THIS RETURNED CHECK WILL RESULT IN YOUR CREDIT FILE BEING IMPACTED WITH A NEGATIVE REFERENCE WHICH MAY IMPACT FUTURE CREDIT GRANTING DECISIONS.”  Id. at 425.  The Court rejected the consumer’s FDCPA claim, stating that such language would not only “promote payment of valid debts” it also “promotes disclosing genuine claims of invalid debts . . . . Undeniably, one way to encourage someone with a true dispute to come forward and resolve that dispute is to inform him of the possible negative consequences of his continued inaction.  Promoting final resolution of such matters, either way, is inherently beneficial.”  Id. at 418, n. 7.

             More recently, the Fifth Circuit embraced the reasoning of Durkin in the case of McMurray v. ProCollect, Inc., 687 F.3d 665 (5th Cir. 2012).  There, the collector’s letter warned the consumer of the negative consequence of nonpayment as follows: “ It is important that you pay your debt as failure to timely validate the referenced amount due will cause us to report your account to the credit reporting agencies.  The negative mark can remain on your credit for up to seven (7) years, and may among other things significantly affect your ability to: (1) OBTAIN CREDIT; (2) OBTAIN EMPLOYMENT; (3) PURCHASE HOME OR CAR; OR (4) QUALIFY FOR APARTMENT RENTAL.”  Id. at 667.  The Fifth Circuit rejected the consumer’s argument that this language amounted to a “threat” that overshadowed the validation notice in violation of section 1692g of the FDCPA: “The supposed threat falls in the category of letters that encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay, words that do not overshadow the required notice language. . . The letter in this case essentially provided such warnings and nothing more.  Thus, the notice language in ProCollect's letter is not overshadowed by the letter's bad-credit warnings.”  Id. at 671 (citations and quotation marks omitted).

             During the past three decades, district courts from around the country have repeatedly held that collectors may properly inform consumers about adverse credit consequences resulting from their failure to pay.  See, e.g., Wright v. Credit Bureau of Georgia, 555 F. Supp. 1005 (N.D. Ga. 1983) (“If the defendants' letters contain any threat to a consumer's credit rating, the threat is at most a statement that the results of the defendants' collection efforts may some day affect the debtor's credit rating.  Thus the letters convey no specific threat greater than the well-known fact, recognized by all consumers, regardless of the degree of their sophistication, that a failure to pay one's bills will affect his ability to obtain credit in the future. Such a threat does not violate the FDCPA.”); White v. Financial Credit Corp., 2001 WL 1665386, at *5 (N.D. Ill. Dec. 27, 2001) (letter offering to “amend your credit report” did not violate section 1692e of the FDCPA); Hogan v. MKM Acquisitions, LLC, 241 F. Supp. 2d 896 (N.D. Ill. 2003)(letter offering to “improve” the consumer’s credit rating did not violate the FDCPA:  “Even an unsophisticated debtor should realize that the fewer delinquent notices on one's credit report, the better one's credit rating will be.”); Jones v. CBE Group, Inc., 215 F.R.D. 558, 566 (D. Minn. 2003) (“Adverse credit reporting is one the debt collector's most important inducements to prompt payment.  But the opportunity to avoid a negative credit report is also a significant benefit to debtors.”); Hapin v. Arrow Financial Services, 428 F. Supp. 2d 1057 (N.D. Cal. 2006) (letter “correctly informed” debtors that “paying their obligations might ‘help regain [their] financial future’” and did not violate FDCPA); Kimmel v. Cavalry Portfolio Services, LLC, 2011 WL 3204841 (E.D. Pa. July 28, 2011) (letter stating that payment would help debtor get back on the road to financial recovery did not violate FDCPA:  “…Defendant's comments about improving Plaintiff's financial situation merely underscored the fact that if Plaintiff accepted Defendant's settlement offer, the debt associated with his Bank of America account would be eliminated. There is nothing deceptive about this statement.”); Hartley v. Suburban Radiologic, 295 F.R.D. 357 (D. Minn. 2013) (letter stating that the alternatives available to the collector  “should you not clear this obligation may include damage to your credit rating” was an “an accurate statement of the possible outcomes of failing to respond” to the letter); Erickson v. Performant Recovery, Inc., 2013 WL 3223367 (D. Minn. June 25, 2013) (statement that debtor’s credit “was so ruined by this debt that” the debtor “couldn't even buy an apple” not actionable under the FDCPA: “Simply expressing an opinion about someone's credit score as a consequence of unpaid debts is not material to the collection of the debt.”).

             Would the CFPB approve of the use of the letters that each of these courts has found to be lawful?  It is hard to say.  We know that Congress believes it is important for consumers to know when negative information has been reported about them to the consumer reporting agencies.  It is difficult to reconcile the CFPB’s stern warnings in its July 2013 Bulletin with the reasoning employed by the courts that have held that debt collectors can and should inform consumers that their failure to pay their debts could impact their credit. 

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