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9th Cir. Holds Servicer’s Post-Discharge Credit Pulls Did Not Violate FCRA

credit reportThe U.S. Court of Appeals for the Ninth Circuit recently affirmed entry of summary judgment in favor of a mortgage servicer against claims brought by plaintiff homeowners that obtaining their credit reports after their mortgage loans had been discharged in bankruptcy willfully violated the federal Fair Credit Reporting Act.

After the trial court declined to consider whether the servicer’s conduct violated the FCRA, 15 U.S.C. § 1681, et seq., instead holding only that their actions did not constitute a willful violation, the Ninth Circuit concluded that the servicer was permitted to review plaintiffs’ accounts and credit reports under 15 U.S.C. 1681b(a)(3)(A) to determine whether it could offer the discharged consumers alternatives to foreclosure, and thus did not violate the act, and rendering the issue of willfulness essentially moot.

A copy of the opinion in Marino v. Ocwen Loan Servicing LLC is available at:  Link to Opinion.

Plaintiff homeowners (“consumers”) filed for bankruptcy and received discharges of their respective personal liability for the mortgage debt secured by their homes.   Following the discharges, the consumers continued to hold title to their respective properties, subject to the mortgage liens which survived their bankruptcies.  Thereafter, the servicer of the consumers’ mortgages obtained the consumers’ credit reports.

The consumers filed suit alleging that the servicer willfully violated the FCRA by obtaining their credit reports when they purportedly had no permissible reasons to obtain their reports in light of the discharges. 

The servicer moved for summary judgment, arguing that the continued credit relationships with the consumers as a result of the survival of the mortgage liens post-bankruptcy justified a periodic review of their credit reports, and a permissible purpose to obtain the reports under subsections 1681b(a)(3)(A), (E) & (F) of the FCRA. 

Relying upon the Ninth Circuit’s ruling in Vanamann v. Nationstar Mortgage, LLC, 735 F. App’x 260 (9th Cir. 2018), which affirmed summary judgment in a mortgage servicer’s favor for failure to prove that its alleged FCRA violations were willful, the trial court granted summary judgment in favor of the servicer, concluding that the servicer did not willfully violate the FCRA. 

Notably, the trial court did not consider whether the servicer’s conduct itself amounted to a violation of the FCRA.

On appeal, the issue before the Ninth Circuit was whether the consumers could show that their evidence permitted a reasonable fact finder to reach conclusions that the servicer’s post-discharge credit inquiries violated the FCRA, and that the purported violations were willful.

The Ninth Circuit noted that in nearly every case involving unclear statutory language — such as the purported FCRA violation here — an appellate court may dispose of the appeal by concluding that the defendant did not negligently or willfully violate the statute. “But if the appellate court addresses only the negligence or willfulness issue and leaves the question of statutory interpretation undecided, then the question of statutory interpretation will likely never be answered.” 

Here, the appellate court wanted to first consider whether the servicer committed violations of the FCRA in the first place “to prevent the law in this area from stagnating,” and encouraged Ninth Circuit district courts to “determine whether the defendant committed a violation of the FCRA before turning to questions of negligence and willfulness.”  Thus, the appellate court turned to the question of whether the consumers demonstrated that the servicer lacked a permissible purpose for obtaining their credit reports after their mortgage debts were discharged.

On appeal, the consumers argued that the servicer had no legitimate use for their credit reports because following their discharges, they could do nothing except foreclose their liens, and the consumers’ credit was not relevant to foreclosure. 

The Ninth Circuit disagreed, reasoning that the servicer was not prohibited from insuring whether the consumers wished to explore alternatives to foreclosure to keep their homes as permitted under the discharge provisions of the bankruptcy code.  See 11 U.S.C. § 524(j)(3). 

Indeed, the servicer’s declaration filed with its motion for summary judgment explained that it sought to evaluate the consumers “for loss mitigation options, such as loan modification, HAMP [i.e., the federal government’s Home Affordable Modification Program], short sale, deed-in-lieu of foreclosure, second mortgage, and cash-for keys.” 

For this purpose, the appellate court found that using a credit report fit within the scope of subsection 1681(a)(3)(A) of the FCRA, by “intend[ing] to use the information in connection with a credit transaction involving the consumer … and involving the extension of credit to, or review or collection of an account of, the consumer.”  15 U.S.C. § 1681b(a)(3)(A).  Accordingly, the Ninth Circuit held that a reasonable finder of fact could not conclude that the servicer lacked a permissible purpose for obtaining the consumers’ credit reports.

Although this finding rendered the issue of willfulness essentially moot, the Ninth Circuit nevertheless briefly addressed the issue.

As you may recall, to prove that a violation of the FCRA was willful, a plaintiff must show that the defendant either knowingly violated the act or recklessly disregarded the act’s requirements. See Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 69 (2007). To show that a defendant recklessly disregarded the act’s requirements, a plaintiff must show that the defendant “ran a risk of violating the law substantially greater than the risk associated with a reading [of the act] that was merely careless.” Id.

Here, because the Ninth Circuit interpreted the FCRA to mean what the servicer thought it meant, the servicer could not have intentionally or recklessly misinterpreted the FCRA and also did not willfully violate the FCRA.

For these reasons, the trial court’s grant of summary judgment to the servicer was affirmed.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions. For more information, see https://mauricewutscher.com/attorneys/christopher-p-hahn/

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