The U.S. Court of Appeals for the Third Circuit has ruled that in determining whether a credit report is inaccurate or misleading under the Fair Credit Reporting Act’s “maximum possible accuracy” requirement, a district court should apply a “reasonable reader” standard.  Ballard Spahr attorneys are currently representing clients in cases involving this legal issue.

Bibbs v. Trans Union LLC was one of three district court cases consolidated on appeal in which the plaintiff alleged that Trans Union had violated the FCRA requirements (1) in 15 U.S.C. Sec. 1681e(b) for a consumer reporting agency (CRA) to “assure maximum possible accuracy” in its credit reports, and (2) in 15 U.S.C. Sec. 1681i(a) for a CRA to “conduct a reasonable reinvestigation to determine whether [information disputed by the consumer] is inaccurate.”  The plaintiffs in each of the three cases had obtained student loans, with two of the plaintiffs having obtained their loans from the same lender.   Following nonpayment by each of the plaintiffs, their respective lenders closed their accounts and transferred them.  Once the loans were transferred, their account balances with the lenders immediately went to zero and all of their payment obligations were transferred.  Each plaintiff’s credit report contained the same negative pay status notation: “Account 120 Days Past Due Date.”

It was undisputed that (1) the plaintiffs failed to make timely payments on their loans, (2) Trans Union accurately reported their accounts as late until the dates they were closed and the balances were transferred, and (3) the plaintiffs owed no balance to their previous creditors once the accounts were transferred.   The plaintiffs argued that the negative pay status notations on their credit reports were inaccurate and could mislead prospective creditors to incorrectly assume that the plaintiffs were currently more than 120 days past due.  The plaintiffs’ lawyers sent letters to Trans Union disputing the accuracy of the credit reports in which they stated that it was impossible for the plaintiffs’ current status to be listed as late when they owed no money to the previous creditors.  After investigating the disputes, Trans Union sent each plaintiff a report with the results of its investigation in which it explained that for accounts that have been closed and paid, the pay status represented the last known status of the account. Trans Union did not update or correct the disputed information and instead stated that the reports were correct. 

The district court in each case granted Trans Union’s motion for judgment on the pleadings and dismissed the case without ordering further discovery.   On appeal, the Third Circuit first considered whether it was correct for the district courts to use a “reasonable creditor” standard to determine whether Trans Union’s credit reports were misleading.  The plaintiffs argued that even if the reports would not mislead a “reasonable creditor,” other less sophisticated users could be misled.  After looking at the FCRA’s definition of “creditor” which includes “any person” who engages in the activities described, the Third Circuit found it “unreasonable to assume that Congress, in requiring ‘maximum possible accuracy’ and allowing individuals and entities other than sophisticated creditors to use credit reports to make decisions, drafted the FCRA with the intention that only sophisticated creditors should understand the information that these reports contain.” (emphasis included)

Despite finding that the “reasonable creditor” standard  did not exclude unsophisticated individuals and entities, the Third Circuit nevertheless concluded that the term “reasonable creditor” did not accurately reflect the FCRA’s intent because the FCRA does not limit the permissible use of consumer reports to creditors and contemplates a range of permissible users.  To account for these possibilities, the Third Circuit adopted a “reasonable reader” standard.  It characterized the “reasonable reader” standard as “run[ning]the gamut to include sophisticated entities like banks and less sophisticated individuals such as local landlords.”  According to the Third Circuit:

A court applying the reasonable reader standard to determine the accuracy of an entry in a report must make such a determination by reading the entry not in isolation, but rather by reading the report in its entirety.  On the other hand, if an entry is inaccurate or ambiguous when read both in isolation and in the entirety of the report, that entry is not accurate under Sec. 1681e(b).

Applying the  “reasonable reader” standard to Trans Union’s credit reports, the Third Circuit concluded that the reports were not inaccurate or misleading. Trans Union argued that when read in the entirety of the reports, the pay statuses were clearly historical notations.  It asserted that since each report also indicated in two places that the account was closed and listed a $0 loan balance, the past due status could not create ambiguity regarding a plaintiff’s financial obligations. 

While stating that “perhaps Trans Union could have made the reports even clearer,” the Third Circuit nevertheless found the reports to be clear as is.  It acknowledged that despite the “goal” of maximum possible accuracy set by Sec. 1681e(b), “the possibility of further clarity is not an indication of vagueness; just because a report could potentially be a bit clearer does not mean that it is not very clear at present.”   Agreeing with Trans Union, the Third Circuit found that a reasonable interpretation of Trans Union’s reports in their entirety was that the pay status of a closed account was historical information.  As a result, the Third Circuit held that the reports were accurate under Sec 1681e(b).

In affirming the district courts’ grants of summary judgment to Trans Union, the Third Circuit also ruled that the district courts had correctly dismissed the plaintiffs’ claims that Trans Union violated Sec. 1681i(a) by failing to conduct a good faith investigation.  It considered the plaintiffs’ claims under 1681i(a) to be foreclosed by its holding that the pay status notations were neither inaccurate nor misleading to a reasonable reader.

Finally, the Third Circuit rejected the plaintiffs’ argument that discovery was necessary to determine whether the pay status notations would mislead a creditor and whether creditors were likely to make adverse credit decisions against the plaintiffs based on the lower credit scores caused by the notations.  Because it considered the reasonable reader standard to be an objective and not a subjective standard, the Third Circuit deemed the credit reports to be accurate under 1681i(a) as matter of law, thereby making discovery unnecessary.  The Third Circuit noted that even if the pay status notations reduced the plaintiffs’ credit scores, “this sort of adverse historical notation and consequence” was permissible under Sec. 1681e(b) and that while the reduced credit scores could lead creditors to make adverse credit decisions, “it would be within their right to do so because [the plaintiffs’] credit reports are accurate.”