Tuesday, April 23, 2013

FYI: 10th Cir Rules Borrower's Affidavit of Emotional Distress Sufficient Under FCRA, Debt Collector Had No Duty to Notify CRAs of Credit Dispute

The U.S. Court of Appeals for the Tenth Circuit recently ruled that: 


(1) a borrower's affidavit created a genuine issue of material fact as to whether he had suffered emotional damages as a result of a loan servicer's alleged violation of the federal Fair Credit Reporting Act; 

(2) summary judgment in favor of a loan servicer that was a furnisher of credit information was not appropriate, where the servicer took almost four months to correct its reporting after being notified about a disputed debt by a credit reporting agency;  

(3) a debt collector had no affirmative duty under the federal Fair Debt Collection Practices Act to notify credit reporting agencies of a dispute unless the debt collector knew of the dispute and elected to report to credit reporting agencies; and

(4) absent an agency relationship with the servicer of a borrower's loan after it went into default, a prior loan servicer was not a "debt collector" for purposes of the FDCPA where it acquired the loan before the loan went into default. 


A copy of the opinion is available at:  http://www.ca10.uscourts.gov/opinions/11/11-1340.pdf.
Plaintiff borrower ("Borrower") purchased property with a loan from defendant mortgage lender ("Lender").  Borrower made his first payment in a timely manner.  Shortly thereafter, Lender sold the note on the secondary mortgage market to defendant loan owner ("Loan Owner"), and the servicing of the loan was transferred to defendant loan servicer ("Servicer").  At that point, Borrower's loan was current.   Just before the service transfer, however, Borrower began the process of refinancing the loan on the property, but did not advise the refinance closing agent that the servicing had transferred to Servicer. 


Several days later, Borrower informed Servicer that the loan had been refinanced, even though he had not yet delivered the required funds to the closing agent.   When Borrower delivered the payoff funds needed to refinance the purchase loan to the closing agent, he again failed to mention the transfer of servicing of the purchase loan to Servicer. 


The closing agent on the refinancing loan then wired the payoff funds on the purchase loan to the original servicer, which in turn wired the funds to Lender.  Neither Servicer nor Loan Owner ever received the payoff funds.   Servicer, not having received the funds that Borrower purportedly believed to have been paid, sent Borrower a past-due notice and a letter explaining foreclosure and loss mitigation options. Servicer also reported negative credit information on Borrower to a credit reporting agency ("CRA").  


Borrower contacted Servicer, informing Servicer that the purchase loan had been refinanced, and that the refinancing loan was being serviced by another servicer.  Servicer informed Borrower that it had not received the payoff funds, and thus advised Borrower to contact the servicer of the refinancing loan about the status of the purchase loan payoff.  Servicer eventually hired a foreclosure law firm ("Law Firm") to commence foreclosure proceedings.  As part of the foreclosure process, Law Firm sent Borrower a debt validation notice advising him of his right to contact Law Firm to dispute the debt. 


In response, Borrower sent a copy of the loan settlement statement showing where the payoff funds were supposed to have been sent, as well as a letter from the servicer of the refinancing loan stating that Borrower should contact the refinancing closing agent if Servicer had not received the payoff funds.  Law Firm forwarded the information to Servicer, and informed Borrower that it had received his correspondence disputing the foreclosure.  Law Firm then placed the file on hold.


In the meantime, Servicer transferred its servicing of the purchase loan to another servicer, received a number of payments on the purchase loan from Lender, which Servicer returned as insufficient to cure the delinquency, and provided negative credit reports regarding Borrower to CRAs.  


In addition, Borrower made several complaints to both Servicer and Law Firm regarding the disputed debt, and Servicer accordingly began investigating Borrower's complaints.    Law Firm also sent a letter to Borrower partly stating that its client had indicated that the loan should have been "paid-in-full," and that Borrower's "credit report will be reversed."


Servicer also received notice from one CRA that Borrower disputed the negative credit reports.   Almost four months after notification of the dispute from the CRA, Servicer, having sought and received a copy of the cashed payoff check, corrected the negative reporting. 


Borrower filed a complaint in federal court, seeking damages and alleging claims under the federal Fair Debt Collection Practices Act ("FDCPA") and the Fair Credit Reporting Act ("FCRA"), as well as a state-law claim for outrageous conduct.  Borrower alleged that Servicer and Law Firm, among others, negligently and willfully failed to investigate and to make corrections in a timely manner after being notified by a CRA that Borrower disputed the reporting.  Borrower also alleged that Servicer and Law Firm violated the FDCPA by using threats of foreclosure, among other things, to collect on a debt that Borrower no longer owed.


Servicer, Law Firm, and other defendants moved for summary judgment, which the lower court granted, concluding that Borrower failed to provide evidence of actual damages or willfulness to support his FCRA claim, that Servicer was not a "debt collector" under the FDCPA, and that the FDCPA claim against Law Firm was barred by the one-year statute of limitations.  Borrower appealed.


The Tenth Circuit reversed in part and affirmed in part, concluding that Borrower had established a genuine issue of material fact with respect to his claim of emotional damages, and with respect to whether Servicer's reporting was "incomplete or inaccurate" under section 1681s-2(b) of the FCRA. 


As you may recall, with respect to credit reporting under the FCRA, a furnisher of information who has received notice of a dispute from a CRA is required to:  (1) investigate the disputed information;  (2) review all relevant information provided by the CRA;  (3) report the results of the investigation to the CRA;  (4) report the results of the investigation to all other CRAs if the investigation reveals that the information is incomplete or inaccurate; and  (5) modify, delete, or permanently block the reporting of the disputed information if it is determined to be inaccurate, incomplete, or unverifiable.  15 U.S.C. § 1681s-2(b).  


Also, a consumer is entitled to actual damages for a negligent violation, and to statutory and even punitive damages if the violation is willful.  See 15 U.S.C.  §§ 1681o(a), 1681n(a). 


Moreover, the FCRA requires furnishers of information to correct information that is provided "in such a manner as to create a materially misleading impression."  See 15 U.S.C. § 1681s-2(b)(1)(D).  See also Boggio v. USAA Fed. Sav. Bank, 696 F.3d 611, 617 (6th Cir. 2012).  Furnishers are required to make any necessary corrections within 30 days from the date the furnisher receives notice of the dispute from a CRA.  15 U.S.C. §§ 1681s-2(b)(2), 1681i(a)(1).  See also Marshall v. Swift River Acad., LLC, 327 F. App'x 13, 15 (9th Cir. 2009).


Finally, as to debt collection, the FDCPA applies only to debt collection activities of "debt collectors," and thus specifically excludes from its scope "any person collecting or attempting to collect any debt . .  . which was not in default at the time it was obtained by such person."  15 U.S.C. § 1692a(6)(F).   See also 15 U.S.C. § 1692e(prohibiting the use of false, misleading, or deceptive means to collect debt).  The FDCPA also provides that a claim for relief under the FDCPA must be brought "within one year from the date on which the violation occurs."  15 U.S.C. 1692k(d).


Addressing Borrower's FCRA-related assertion that he suffered economic harm, in that Servicer's negative credit reporting ruined his credit score and prevented him from being able to obtain additional loans,  the Tenth Circuit concluded that Borrower failed to create a genuine dispute.  Noting that Borrower's credit score dropped by only three points, rather than the 100 points Borrower had claimed, and that most of the evidence Borrower presented with respect to his credit score was inadmissible hearsay, the Tenth Circuit pointed out that there was no evidence that he actually applied for and had been denied additional loans.   Stressing that Borrower failed to meet his burden of presenting evidence to support his claim of economic harm,  the Court affirmed the lower court's grant of summary judgment in favor of Servicer on this claim.


Turning to Borrower's claim that he suffered emotional damages as a result of Servicer's alleged FCRA violation, the Tenth Circuit rejected Servicer's argument that Borrower provided only "conclusory and uncorroborated statements" in his affidavit, and thus failed to produce any evidence to support that claim.  In so doing, the Court pointed out in part that, in relying on his own testimony, Borrower was required to "explain [his] injury in reasonable detail and not rely on conclusory statements."  See Bagby v. Experian Info. Solutions, Inc., 162 F. App'x 600, 605 (7th Cir. 2006). 


Viewing his affidavit in the light most favorable to Borrower, the Tenth Circuit concluded that Borrower's detailed explanation of the state of his health prior to and after the negative reporting provided sufficient evidence that he suffered emotional damages as a result of Servicer's alleged actions, even though he also experienced other stressful events during the same period.  See Robinson v. Equifax Info. Servs., LLC, 560 F.3d 235, 242 (4th Cir. 2009); Bach v. First Union Nat'l Bank, 149 F. App'x 354, 362 (6th Cir. 2005).  Thus, disagreeing with the lower court, the Tenth Circuit concluded that Borrower's affidavit alone created a genuine dispute as to whether Servicer's actions caused him to suffer emotional damages. 


With regard to Borrower's contention that he was entitled to punitive damages because Servicer willfully violated the FCRA, the Tenth Circuit pointed out that Servicer's actions did not rise to the level of a reckless disregard of the FCRA's requirements, and thus did not warrant awarding punitive damages.  In so doing, the Court noted among other things that Borrower failed to show that a letter to Borrower contained an admission that the negative credit reports from Servicer were in error, and that the delay in removing the negative reports was willful. 


The Tenth Circuit nevertheless concluded that Servicer was not entitled to summary judgment as to whether its negative reporting created a materially misleading impression, so as to render it "incomplete or inaccurate" under section 1681s-2(b), given that Servicer took almost four months after being notified by the CRA of the dispute before Servicer removed the negative reporting. 


With respect to Borrower's FDCPA claims, the Tenth Circuit determined that Servicer was not a "debt collector" under the FDCPA, as Servicer acquired the servicing rights to the loan when the loan was current.  In so ruling, the court rejected Borrower's argument that Servicer was an agent for the subsequent servicer to which Borrower's loan had been transferred.  As to Law Firm, the court concluded in part that a debt collector has no affirmative duty to notify CRAs that a consumer disputes a debt, unless the debt collector knows of the dispute and nevertheless elects to report to a CRA.  See Wilhelm v. Credico, Inc., 519 F.3d 416 (8th Cir. 2008)(relying on Federal Trade Commission Staff Commentary in interpretation of FDCPA reporting requirements).  


The Tenth Circuit also held that, because a debt collector had no duty to report a dispute after reporting a debt, Law Firm's failure to report the dispute or to have Servicer reverse its reporting could not be considered in evaluating the timeliness of Borrower's claim against it.  Thus, because Borrower presented no evidence showing that Law Firm took any actions within the one-year statute of limitation period that supported a claim under the FDCPA, the Court ruled that Law Firm was entitled to summary judgment on this claim. 


Accordingly, the Tenth Circuit affirmed in part, reversed in part, and remanded.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com


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