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From Banking and Finance Law Daily, February 24, 2014

Despite Higher Education Act, university’s duties as FCRA “furnisher” endure

By Thomas G. Wolfe, J.D.

In connection with a consumer’s lawsuit against a university for negligent and willful violations of the federal Fair Credit Reporting Act for the university’s alleged reporting of certain information to consumer reporting agencies about the consumer’s student loan, the U.S. Court of Appeals for the Third Circuit ruled that although the federal Higher Education Act of 1965 (HEA) provides that a consumer reporting agency may disregard the FCRA’s seven-year “aging off” rule when reporting data on certain federally-backed education loans, the contours of the university’s FCRA duties—as a “furnisher” of information to the reporting agencies—remained operative (Seamons v. Temple University, Feb. 21, 2014, Vanaskie, Circuit Judge).

In vacating the federal trial court’s order granting summary judgment to the university and remanding the matter for further proceedings, the Third Circuit determined that: (i) furnishers of consumer credit data remain obligated to report fully and accurately under the FCRA regarding the collection history and date of delinquency for an HEA-qualifying education loan; (ii) genuine issues of material fact remain as to whether the university negligently failed to comply with its obligations under the FCRA; (iii) since a private cause of action arises under the FCRA (15 U.S.C. § 1681s-2(b)) when, having received notice of a consumer’s potentially meritorious dispute, a furnisher of information fails to report that the claim is disputed, there remains a genuine issue of material fact about whether the university violated that FCRA duty; and (iv) the consumer stated a valid claim for the university’s alleged willful violations of the FCRA.

Background. In January 1989, the consumer received a need-based Federal Perkins Loan in the amount of $1,180 from Temple University, and payments were slated to begin in January 1992. When the consumer failed to make payments on the student loan, the loan was declared delinquent in February 1992. In August 1992, Temple University notified the consumer that the full balance on his Federal Perkins Loan remained unpaid and that his account had been placed for collection.

Many years later, in the spring of 2011, the consumer sought financial aid—a Pell Grant—at a different university, but that university refused to provide any financial assistance to him until he repaid the balance on the prior federal student loan. Accordingly, in April 2011, the consumer paid off the Federal Perkins Loan in full.

In May 2011, the consumer contended that he noticed, for the first time, a “trade line” on his credit report summarizing data pertaining to the recently paid-off student loan. Temple University reported certain information about the loan to TransUnion, a credit reporting agency. While much of the information furnished by the university was in codes, rather than text, the university did not report the date the loan was first delinquent nor indicated that the consumer’s account had been placed for collection. When the consumer contacted TransUnion over the phone to dispute the information contained in his credit report, the consumer reporting agency notified Temple University to verify the consumer’s “payment history profile” and loan “account status.”

Through its loan servicer, ACS Education Services, Inc. (ACS), Temple University “resubmitted the information to TransUnion virtually unchanged” and did not indicate that the consumer now disputed the trade line. In August 2011, the consumer again contacted Temple University, as well as TransUnion and Equifax, another national consumer reporting agency, to dispute the inclusion of Temple University’s trade line on his credit report. Among other things, the consumer emphasized in his letter that “suddenly after the debt was paid, Temple University reported two years worth of late payments all at once … To put it plainly, I want the Temple University account removed from my credit report.”

After a second investigation by ACS, while Temple University modified its loan report, it still did not report “the loan’s history in collections, a date of first delinquency, or the fact that the consumer was disputing the accuracy of the reported information.” According to the court, an ACS employee stated in his deposition testimony that “employees would never flag an account as disputed, regardless of the nature of the consumer’s challenge.” Moreover, a separate customer service representative for ACS, in her deposition testimony, indicated that she “spent an average of 15 minutes on any given dispute and that ACS provided no written guidelines or formal training from managers for her.”

FCRA lawsuit. In October 2011, the consumer filed a complaint against Temple University, but not ACS, in federal court, alleging that the university negligently or willfully violated the FCRA with respect to its reporting of the federal student loan. In May 2012, Temple University requested summary judgment in its favor, essentially arguing that the HEA exempted the university from compliance with the FCRA because the “credit instrument at issue” was the Federal Perkins Loan. In October 2012, the federal trial court granted the university’s motion for summary judgment, and the consumer appealed that decision to the Third Circuit.

FCRA furnisher duties. The Third Circuit noted that, under the FCRA, consumer reporting agencies are generally not permitted to report an adverse item after seven years; “in industry parlance, it has ‘aged off’ the consumer’s credit report.” The furnisher of information is required to notify the consumer reporting agency of the date of an account’s delinquency when the furnisher has placed the account for collection, or otherwise charged it to “profit or loss,” so that the reporting agency can then compute the seven-year period.

With this backdrop in mind, the federal appellate court observed that, for a conventional, non-education loan, the consumer’s Temple University trade line on his credit report would have “aged off” by “some point in 1999.” However, under an HEA provision (20 U.S.C. §1087cc(c)(3)), consumer reporting agencies are directed to “disregard” the FCRA aging-off provision because of the underlying legislative policy to allow reporting of defaulted loans as “an effective tool…[to be] available to institutions and the Secretary of Education for the entire period that loan collection is allowed.”

In ruling that furnishers of consumer credit data remain obligated to report fully and accurately under FCRA regarding the collection history and date of delinquency for an HEA-qualifying education loan, the Third Circuit determined that: (i) the HEA statutory language only mentions consumer reporting agencies, not furnishers of information; (ii) although Temple University was concerned that the consumer reporting agencies might have failed to notice the loan was an HEA-qualifying education loan, the university could have “allayed its own concerns about the CRAs’ possible mischaracterization of the Loan by providing them with more information rather than less”; and (iii) the HEA did not exempt the university, as a furnisher, from its typical FCRA reporting obligations.

Negligence claim. In ruling that genuine issues of material fact remain as to whether Temple University negligently failed to comply with its obligations under the FCRA, the Third Circuit determined that: (i) the consumer’s FCRA claims were predicated solely on the university’s “conduct after it was informed” of the consumer’s dispute by TransUnion (ii) the furnisher’s investigation was required to be reasonable; and (iii) thorny factual issues about the completeness and accuracy of the university’s investigation, as well as the university’s failure to report the student loan collection history and date of delinquency, combined to withstand a motion for summary judgment.

Failure to flag account as disputed. The Third Circuit ruled that since a private cause of action arises under the FCRA (15 U.S.C. § 1681s-2(b)) when a furnisher of information fails to properly report that a claim is disputed, there remained a genuine issue of material fact about whether the university violated that FCRA duty, especially since the university received notice of the consumer’s potentially meritorious dispute.

In concluding that a furnisher’s continuing failure to flag an account as disputed also constitutes a violation of the FCRA (15 U.S.C. § 1681s-2(b)), requiring complete and accurate post-dispute reporting of debts, and privately enforceable, the Third Circuit noted that it was joining two other federal appellate courts that have addressed the issue.

Willfulness claim. The Third Circuit noted that, under the U.S. Supreme Court standard, the liability for a willful violation of the FCRA (15 U.S.C. § 1681n) “will lie not only in the case of knowing violations of the statute but also if a defendant acts with ‘reckless disregard’ of the statute’s terms.”

Consequently, in deciding that the consumer stated a valid claim for the university’s alleged willful violations of the FCRA, the Third Circuit pointed out that the federal trial court erroneously endorsed the “reasonableness” of Temple University’s conduct. The Third Circuit asserted that the plain text of the HEA provision “simply does not affect reporting obligations under FCRA for furnishers such as Temple.” Further, the Third Circuit underscored the fact that the consumer presented sufficient evidence that undertrained ACS representatives spent, on average, only 15 minutes investigating each dispute, and that it was the policy of ACS never to “flag accounts as disputed or to report dates of first delinquency.” According to the court, “If true, these policies would appear to be in outright conflict with a furnisher’s duties under FCRA.”

The case is No. 12-4298.

Attorneys: Gregory J. Gorski, Mark D. Mailman, and John Soumilas (Francis & Mailman) for appellant Edward Seamons. Richard J. Perr (Fineman, Krekstein & Harris) for appellee Temple University.

Companies: ACS Education Services, Inc.; Equifax; Temple University; TransUnion

MainStory: TopStory DelawareNews FairCreditReporting Loans NewJerseyNews PennsylvaniaNews Preemption VirginIslandsNews

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