The U.S. Court of Appeals for the Second Circuit recently ruled that a plaintiff who alleged that Experian had violated the Fair Credit Reporting Act by including a discharged student loan debt on his credit report had not alleged an inaccuracy for purposes of the FCRA requirement that consumer reporting agencies (CRAs) follow reasonable procedures to assure the accuracy of information included in consumer reports. According to the court, the inaccuracy alleged by the plaintiff was not cognizable under the FCRA because whether the loan had been discharged turned on a legal dispute.
In Mader v Experian Information Solutions, the plaintiff claimed that his credit report was inaccurate because it listed his outstanding student loan debt following his Chapter 7 bankruptcy. He alleged that the loan was discharged because, as a private loan, it was not exempted from discharge under Section 523(a)(8) of the Bankruptcy Code. That section defines as non-dischargeable, among other debts, “an educational…loan made, insured, or guaranteed by a government unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.”
The district court concluded that the loan was non-dischargeable based on evidence indicating that the loan was “made under a program that was funded, in part, by non-profit organizations, including governmental units.” Since the loan’s inclusion on the plaintiff’s credit report was not an inaccuracy, the district court granted Experian’s motion for summary judgment.
While the Second Circuit affirmed the district court, it did so on the alternate ground that the plaintiff had failed to allege an inaccuracy within the plain meaning of the FCRA. According to the Second Circuit, there was a genuine dispute in the record whether the plaintiff’s loan was made under a “program” that included governmental funding and therefore non-dischargeable. However, the Second Circuit agreed with Experian’s argument that the FCRA does not require CRAs to adjudicate legal disputes such as the post-bankruptcy validity of the plaintiff’s education loan debt.
Because the FCRA does not define the term ”accuracy,” the Second Circuit looked to the dictionary definition which it read to require “a focus on objectively and readily verifiable information.” The Second Circuit concluded that the inaccuracy alleged by the plaintiff did not meet this statutory test because whether the loan was non-dischargeable “evades objective verification.” Because there was no bankruptcy order explicitly discharging the debt, “the accuracy of Experian’s reporting that the debt was still owed depended on whether it is ‘dischargeable,’ which itself depends on whether section 523(a)(8) applies [to the program under which the plaintiff’s loan was made.]” As a result, it would be necessary to resolve the factual dispute over the funding and structure of the plaintiff’s loan program to determine whether his loan was discharged. The Second Circuit concluded that “[t]he bespoke attention and legal reasoning required to determine the post-bankruptcy validity of [the plaintiff’s] debt means that its status is not sufficiently objectively verifiable to render [the plaintiff’s] credit report ‘inaccurate’ under the FCRA.”
The Second Circuit also noted that every other circuit to have considered an analogous question has agreed that inaccuracies that turn on legal disputes are not cognizable under the FCRA. (The Circuits identified were the First, Seventh, Ninth, and Tenth Circuits.) It also noted that its holding did not mean that the FCRA never requires CRAs to accurately report information “derived from the readily verifiable and straightforward application of law to facts.” As an example, the Second Circuit cited to cases holding that misreporting the clear effect of a bankruptcy discharge on certain types of debt is a cognizable inaccuracy under the FCRA. It also noted that “if a legal question is sufficiently settled so that the import on a particular debt is readily and objectively verifiable, the FCRA sometimes requires that the implications of that decision be reflected in credit reports.”
The CFPB and the FTC recently filed an amicus brief in another case pending before the Second Circuit also involving the issue of whether legal inaccuracies are cognizable under the FCRA. In Sessa v. Trans Union, LLC, the plaintiff filed a putative class action alleging that TransUnion reported she owed a “balloon payment” on a vehicle lease, but then inaccurately reported the amount owed as the vehicle’s residual value, which was an optional amount to purchase the vehicle at the end of the lease and greater than the actual amount owed. [link to blog]
The district court granted summary judgment to TransUnion holding that plaintiff failed to make the “threshold showing” of inaccuracy on the consumer report. First, the court drew a distinction between factual and legal inaccuracies and held that a CRA cannot be held liable when the issue requires a legal determination as to the validity of the debt the agency reported. In the court’s view, whether the plaintiff in fact owed a balloon payment at the end of the lease was a “legal dispute” that requires “a legal interpretation of the loan’s terms.” Second, the court concluded that the information in the credit report was factually accurate because TransUnion reported the exact information it received from the data furnisher.
In their amicus brief filed in the plaintiff’s appeal to the Second Circuit, the CFPB and FTC argue that the text of the FCRA makes no distinction between factual and legal inaccuracies, and that importing a distinction between factual and legal inaccuracies into the law is unworkable in practice. They argue that most, if not all, inaccuracies in consumer reports could be characterized as legal, which would create an exception that would swallow the rule, effectively rendering the reasonable procedures section of the FCRA a nullity. More specifically, debts are creatures of contract and any inaccurate representation pertaining to an individual’s debt obligations could arguably be characterized as a legal inaccuracy insofar as determining the truth or falsity of the representation requires contractual interpretation. Whether an error is defined as factual or legal, a consumer report may still be incorrect.
The Second Circuit has scheduled oral argument in the case for March 3, 2023.