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9th Cir. Reverses Ruling in Favor of Lender in FCRA ‘Charged Off Second’ Case

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court’s grant of summary judgment in favor of a mortgage lender in a consumer’s action. 

The consumer had alleged that the lender violated the federal Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., by supposedly failing to reasonably investigate the consumer’s dispute concerning a foreclosed out subordinate lien loan that the lender eventually reported to credit reporting agencies as “charged off” rather than “abolished,” and by supposedly providing inaccurate information to those agencies. 

In reversing the trial court’s ruling, the Ninth Circuit concluded that the consumer more than satisfied his burden to make a prima facie showing of inaccurate reporting by establishing as a matter of law that the lender’s reports were “patently incorrect.”  The Ninth Circuit also held that there was a genuine factual dispute about the reasonableness of the lender’s investigation.

A copy of the opinion in Gross v. CitiMortgage, Inc. is available at:  Link to Opinion.

In this matter, the lender reported the consumer’s junior mortgage loan as “past due,” with accruing interest and late fees and a string of missed payments. The consumer then submitted a written dispute to a credit reporting agency, which in turn sent notice to the lender. 

The consumer’s dispute noted that he had lost his home in a foreclosure sale and no longer owed the junior mortgage loan. Furthermore, the consumer included a citation to the Arizona Revised Statutes, pointing to the provision that purportedly “abolished” the debt, the Arizona Anti-Deficiency Statute. After a second written dispute, the lender eventually reported the debt as “charged off,” rather than “abolished.”

The consumer then sued the lender under FCRA.  The consumer alleged that the lender violated FCRA by supposedly failing to reasonably investigate his dispute and by supposedly providing inaccurate information to the three national credit reporting agencies.

On cross-motions for summary judgment, the trial court ruled for the lender, determining that its reports to the credit reporting agencies were accurate as a matter of law and that the lender had reasonably investigated the consumer’s disputes. The consumer timely appealed.

As you recall, the FCRA regulates how furnishers must respond to a notice of dispute from a credit reporting agency. Among other things, the furnisher must correct or delete inaccurate information after conducting an “investigation with respect to the disputed information.” 15 U.S.C. § 1681s-2(b). That “investigation” must be at least “reasonable” and “non-cursory.” Gorman v. Wolpoff & Abramson, LLP, 584 F.3d 1147, 1157 (9th Cir. 2009). A consumer may sue a furnisher and recover damages if the furnisher willfully or negligently violated the FCRA. 15 U.S.C. §§ 1681n, 1681o; see Syed v. M- I, LLC, 853 F.3d 492, 503 (9th Cir. 2017).

Here, the Ninth Circuit determined that a furnisher’s duties resemble those of a credit reporting agency, which can also be found liable for failing to “follow reasonable procedures to assure maximum possible accuracy” of information on a credit report. 15 U.S.C. § 1681e(b); see also 15 U.S.C. §§ 1681n, 1681o. In such lawsuits, before a court considers the reasonableness of the agency’s procedures, the consumer must make a “prima facie showing” of inaccuracy in the agency’s reporting. Shaw v. Experian Info. Sols., Inc., 891 F.3d 749, 756 (9thCir. 2018) (quoting Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 890 (9th Cir. 2010)).

Therefore, the Ninth Circuit concluded that the key to this case rested on the Arizona Anti-Deficiency Statute, which provides that after a trustee sale, if a mortgage deficiency remains, “no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness . . ..” Ariz. Rev. Stat. § 33- 814(G). The Court found that this statute “abolished” the consumer’s liability for the debt. Baker v. Gardner, 770 P.2d 766, 772 (Ariz. 1988).

Thus, with the consumer’s liability “abolished,” the Ninth Circuit held that he was no longer obligated to repay the debt. See Black’s Law Dictionary (11th ed. 2019) (defining “debt” as “[l]iability on a claim”); (defining “liable” as “[r]esponsible or answerable in law; legally obligated”). Since the consumer no longer owed a balance, the Court also concluded that his payments were not late, and the loan should not have been accruing interest or late fees. 

Accordingly, the Ninth Circuit held that the lender’s reports were “patently incorrect” and the consumer more than satisfied his burden to make a prima facie showing of inaccurate reporting. Gorman, 584 F.3d at 1163.

Additionally, the Ninth Circuit held that there was a genuine factual dispute about the reasonableness of the lender’s investigation.

Federal regulations require furnishers to “establish and implement reasonable written policies” to ensure the accuracy of their reports. 12 C.F.R. § 1022.42(a). The reasonableness of a furnisher’s policies depends on the “nature, size, complexity, and scope of each furnisher’s activities.” Id. Courts have also identified several factors that inform the reasonableness analysis, including: the furnisher’s relationship to the debt and to the consumer; the level of detail in the credit reporting agency’s notice of dispute; and the feasibility of implementing investigatory procedures, including training staff. See, e.g., Gorman, 584 F.3d at 1157; Felts v. Wells Fargo Bank, N.A., 893 F.3d 1305, 1312 (11th Cir. 2018); Maiteki v. Marten Transport Ltd., 828 F.3d 1272, 1275 (10th Cir. 2016); Johnson v. MBNA Am. Bank, NA, 357 F.3d 426, 432 (4th Cir. 2004).

With these factors at play, the Ninth Circuit concluded that it was best left up to the jury to determine the reasonableness of the lender’s investigation. The Court made the same ruling for the issue of actual damages.

Accordingly, the Ninth Circuit reversed the trial court’s grant of summary judgment in favor of the lender and remanded back to the trial court for further proceedings.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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