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Law360 (July 2, 2020, 3:06 PM EDT )
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| Allison Schoenthal |
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| Ashley Hutto-Schultz |
Consumer advocacy organizations, class action plaintiffs, enforcement agencies and legislators are increasingly focused on those changes, and particularly on any negative impact to customers' credit. Amid an unprecedented economic crisis, credit scores and credit history are recognized as especially important to consumers who are in financial distress and may seek access to credit as they try to recover.
Financial institutions should prepare now for increased fair credit enforcement actions and civil litigation in the coming months and years.
The CARES Act, Reporting Moratoriums and Compliance Challenges
Section 4021 of the federal Coronavirus Aid, Relief, and Economic Security, or CARES, Act, enacted in March, amends the Fair Credit Reporting Act, or FCRA, to require creditors that make an accommodation to a consumer to report any account that has an accommodation"applied to it as current to the credit bureaus — as long as the account was current when the accommodation was made.
Accounts that were delinquent when the accommodation went into effect should "maintain the delinquent status during the period in which the accommodation is in effect," but if the consumer brings the account current during that time period, furnishers must then report the credit obligation as current.
These rules do not apply to charged-off accounts and will apply to accommodations provided to consumers between Jan. 31, 2020 and 120 days after the termination of the COVID-19 national emergency declared by President Donald Trump on March 13.
An accommodation includes any payment forbearance, a payment deferral, a partial payment agreement, a loan modification, or "any other assistance or relief granted to a consumer who is affected by the coronavirus disease 2019 (COVID-19) pandemic during the covered period."
Some such accommodations may be required by state legislation or state emergency order, but others may be provided by mortgage servicers, auto loan servicers, credit card companies and other creditors voluntarily.
Given the wide scope of accommodations, new and evolving[1] requirements, and the necessary changes to reporting practices (many of which are automated), compliance may be imperfect.
Fair credit disputes may arise out of failures to comply with the CARES Act requirements or other adverse reporting moratoriums, but they will not end there. An inevitable wave of negative credit reports on consumer accounts will be issued when the moratoriums period terminates and will almost certainly result in increased fair credit enforcement actions and civil litigation.
Fair Credit Enforcement Actions Likely
Even before the pandemic, the Consumer Financial Protection Bureau and the Federal Trade Commission were focused on credit reporting, and they jointly hosted the Accuracy in Credit Reporting Workshop in December 2019.[2] Credit reporting routinely tops the list of consumer complaints tracked by the CFPB.
In a recent report,[3] the CFPB noted that credit reporting accounted for 52% of all complaints between Jan. 1 and April 30, which far outpaces any other industry. Those numbers have increased since the report, with 21,945 complaints regarding credit reporting recorded in May alone.
The CFPB advises that 58% of consumers who complain about credit reporting claim their reports include incorrect information. This type of complaint will only increase, as moratoriums on negative reporting end, and the demand for consumer credit grows.
Although the CFPB issued a nonbinding policy statement[4] on April 1 explaining the bureau's intent to take a "flexible supervisory and enforcement approach" regarding compliance with the CARES Act, FCRA and Regulation V during the pandemic, consumer reporting FAQs related to the CARES Act and COVID-19 published on June 16[5] confirm that the bureau remains committed to "vigorously enforcing all consumer financial protection laws under its jurisdiction, including the FCRA."
While the CFPB will consider a furnisher's good faith efforts to comply with statutory and regulatory obligations, the bureau states that it will "not hesitate to take public enforcement action when appropriate." The CFPB's recent FAQs highlights several compliance risks including the following.
The CFPB cautions that a furnisher's obligation under the CARES Act to report an obligation as current requires that furnishers:
consider all of the trade line information they furnish that reflects a consumer's status as current or delinquent. For example, information a furnisher provides about an account's payment status, scheduled monthly payment, and the amount past due may all need to be updated to accurately reflect that a consumer's account is current consistent with the CARES Act.
The CFPB also warns that although it encourages furnishers to provide relief to consumers, furnishers should not report consumer accounts as in forbearance if the consumer neither requested forbearance nor is delinquent.
Even if the CFPB did take a back seat, numerous state attorneys general have vowed to aggressively enforce these provisions. Attorneys general for 21 states, Washington, D.C., and Puerto Rico, responded to the CFPB's April statement with a letter[6] that called on the bureau to fully enforce the CARES Act and the FCRA's dispute resolution requirements.
The letter also asserted that even if the "CFPB refuses to act our states will continue to defend our consumers and families throughout this crisis. We will not hesitate to enforce the FCRA's deadlines against companies that fail to comply with the law."
The attorneys general penned a subsequent letter[7] on April 28 to Experian Information Solutions Inc., Equifax Information Services LLC, and TransUnion LCC, restating their commitment to enforce the CARES Act's credit reporting provisions, the FCRA, state law, and the requirements of any agreements that the CRAs have previously entered into with their offices.
Financial institutions should expect that despite the CFPB's nonbinding statement promising flexibility, there will be enforcement in this area at the federal and state level.
A Surge In Fair Credit Litigation Is Already Evident
A review of fair credit actions over the last twelve months indicates that an uptick in litigation under the FCRA is already evident. As illustrated below, for each of the first five months of 2020, there were more FCRA actions filed in federal and state courts than in the corresponding month in 2019.
Many recent FCRA claims against financial services institutions allege they furnished inaccurate information to CRAs. Alleged inaccuracies have included allegations that settled accounts were reported as charged off; or charged off accounts were reported as such but were also reported with a past due balance; or financial institutions failed to properly report debts to CRAs that were discharged through bankruptcy proceedings.
Other FCRA actions allege that financial institutions requested credit reports for impermissible reasons (i.e., in order to market debt relief programs); failed to provide credit score disclosures required by the FCRA each time a lender uses a consumer credit score in connection with an application for a mortgage loan; or failed to conduct a reasonable investigation after being notified by a CRA that a consumer disputes the accuracy of information furnished to the CRA.
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Financial services institutions should be prepared for the increase in FCRA actions to accelerate as forbearance periods end and credit reporting obligations change, allowing for more negative reporting. Litigation alleging failures to comply with the CARES Act or negative reporting moratoriums, as well as claims of inaccurate reporting and other FCRA violations, will almost certainly increase as courts reopen and state moratoriums expire.
Implementing Compliance Lessons From the Last Financial Crisis
Use your compliance management systems. Most financial services providers were required to create, or strengthen their compliance management systems after the last crisis. Such providers should now use their well-crafted compliance management systems to help ensure credit reporting requirements are implemented and being met. However, during this unprecedented time, legal risk and regulatory changes are arising much quicker than normal.
Your compliance management systems should be adapted accordingly. Your change management, compliance monitoring, and consumer complaint management processes may need to operate on shorter time frames to adequately identify credit reporting issues.
For example, if you typically conduct monthly reviews of your consumer complaints, escalating credit reporting-related complaints, or requiring more frequent reviews for credit reporting issues, may be warranted until COVID-related legal requirements and circumstances subside.
In any event, documentation is critical. As was the case following the last financial crisis, regulators will request information about the decisions made during the COVID-19 crisis. Documenting the compliance decisions and efforts made, as well as the surrounding circumstances, will be critical to showing good faith compliance, which the CFPB has indicated that it intends to consider.
Documentation should include, at a minimum: dates and descriptions of changes to policies or procedures; a description of the events leading to such changes; approvals required and obtained; results of any assessments, monitoring, or audits and actions taken to resolve identified issues; and new or updated desk guides or training manuals for employees handling credit reporting-related matters.
There can be little doubt that financial services companies will, in the near term, receive an increased number of inquiries, disputes, investigations and suits related to credit reporting, including those challenging credit reporting practices, the adequacy of staffing and resources, and the accuracy of reporting to the credit bureaus. Companies would be well-served to prepare now to document compliance with the FCRA and CARES Act.
Allison Schoenthal is a partner and head of the consumer finance litigation practice at Hogan Lovells.
Ashley Hutto-Schultz is a senior associate at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] For instance, although it's unlikely to be signed into law in its present form, the Heroes Act, which was passed by the U.S. House of Representatives May 15, 2020, would amend the FCRA to prohibit the reporting of "any adverse item of information (except information related to a felony criminal conviction) relating to a consumer that was the result of any action or inaction that occurred during the Covid-19 emergency period (defined as ending 120 days after this provision is enacted or 120 days after the emergency declaration expires, whichever is later) or during any other "major disaster."
[2] https://www.ftc.gov/news-events/events-calendar/accuracy-consumer-reporting-workshop. Concerns about the accuracy of credit reporting also prompted the drafting of the Comprehensive Credit Reporting Enhancement, Disclosure, Innovation, and Transparency Act of 2020, which was passed by the U.S. House of Representatives in January. That act was described in a press release issued by Chairwoman of the House Committee on Financial Services, Maxine Waters, as an effort to "overhaul the credit reporting system by empowering consumers with more control of their data and requiring consumer reporting agencies ... to better ensure that the information on consumer credit reports is accurate and complete." Although the bill's prospects in the Senate look bleak because it passed the House with no Republican support, it is further evidence of widespread concern about accuracy in credit reporting.
[3] https://files.consumerfinance.gov/f/documents/cfpb_complaint-bulletin_coronavirus-complaints.pdf.
[4] https://files.consumerfinance.gov/f/documents/cfpb_credit-reporting-policy-statement_cares-act_2020-04.pdf.
[5] https://files.consumerfinance.gov/f/documents/cfpb_fcra_consumer-reporting-faqs-covid-19_2020-06.pdf.
[6] https://www.attorneygeneral.gov/wp-content/uploads/2020/04/2020-04-13-final-Letter-to-CFPB-re-non-enforcement-of-regs.pdf.
[7] https://www.attorneygeneral.gov/wp-content/uploads/2020/04/Credit-Reporting-Agencies-Multistate-letter-4.28.20-FINAL-12.52.pdf.
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