By Melissa
Richards Wallace, Esq. of The Wolf Firm(Reprinted by permission from SERVICING MANAGEMENT MAGAZINE October, 1997 Issue)
Major Changes To The Fair Credit Reporting Act Are Now In Effect
By Melissa
Richards Wallace, Esq. of The Wolf Firm
(Reprinted by permission from SERVICING MANAGEMENT MAGAZINE October, 1997
Issue)
INTRODUCTION
The green light is on! Effective September 30th, major changes to the Federal Fair Credit
Reporting Act (FCRA) took effect, directly impacting the manner and extent to which loan
servicers may share consumer credit information with others, report credit information to
credit bureaus, and act on information obtained through consumer credit reports. The
Federal Trade Commission and the Federal Reserve Board have also released new FCRA
notification and disclosure forms for servicers' use in each situation. In case you are
not yet prepared for these changes (or you are asleep at the wheel), here's what you need
to know.
SHARING CREDIT INFORMATION WITH OTHERS
Mortgage servicers regularly engage in gathering and evaluating loan information and they regularly furnish this information to third parties such as loan investors, insurers and their affiliates. The longstanding FCRA rule has been to treat any entity who regularly provides consumer credit information to third parties (and their affiliates) as a consumer reporting agency (CRA) unless the entity is only sharing "experience information," i.e., information that consists of the entity's own transactions and experiences with the consumer. The distinction between what is and what is not "experience information" turns on whether the information reported is based on the entity's own direct information about the borrower or whether that information was gleaned from other sources such as an appraiser, inspection company, attorney or other outside entity.
The pre-amended FCRA also contained a "joint user exception," allowing parties involved in the same transaction to share non-experience information with one another. The "joint user" exception has been interpreted to mean that a creditor can transmit nonexperience information regarding a loan customer or a prospective loan customer to any insurer or guarantor of the loan, or to a loan participant.
The new FCRA permits servicers to share consumer credit information with their affiliates. Congress eased the sharing requirements among affiliates in hopes of facilitating cross-marketing of each company's products and services to the consumer (to provide greater information and access to credit products and services) and to allow affiliates an opportunity to better manage credit risk. Aside from "experience information" which may be shared among affiliates directly or through a central database, affiliates may share any other information, so long as the consumer is notified up front of the affiliates' sharing arrangement and the consumer is afforded the opportunity to opt out of the arrangement.
In return for this relaxation of information sharing, if a creditor takes an adverse action involving insurance, employment or a credit transaction initiated by the consumer, based on "non-experience" information obtained from its affiliate, the creditor must notify the consumer of the adverse action. The notification must inform the consumer that he or she may obtain a disclosure of the nature of the information relied upon by making a written request within 60 days of receiving the adverse action notice. If the consumer makes such a request, the creditor must disclose the nature of the information within 30 days of receiving the request. The Federal Reserve Board has revised its model adverse action notices prescribed under the Equal Credit Opportunity Act to conform with the amended FCRA requirements. Again, this notice requirement applies only if the consumer initiates the request for a loan or credit account, so it does not apply in prescreening or other credit cross-marketing programs initiated by the loan servicer.
The new affiliate sharing provisions in the FCRA preempt any state law or regulation on that subject, whether they fall within state consumer credit reporting statutes or elsewhere, except for certain provisions in effect at the time of enactment under Title 9 of the Vermont Statutes Section 2480e.
FURNISHING CREDIT INFORMATION TO CONSUMER REPORTING AGENCIES
Mortgage servicers are most commonly involved in consumer credit reporting when they report the delinquency status of mortgage loans to credit reporting agencies (referred to in the amended statute as "CRAs"). Investor and insurer guidelines often require that these reports be made.
The amended FCRA for the first time imposes various duties on entities such as mortgage servicers which furnish information to CRAs. Under these new provisions, the mortgage servicer cannot provide information which it knows (or consciously avoids knowing) is inaccurate. Servicers can avoid risk of liability under this new provision, though, if the servicer clearly and conspicuously specifies an address to which consumers may write to notify the furnisher that certain information is inaccurate.
The amended FCRA also imposes duties on mortgage servicers to correct consumer credit information reported to a CRA and to update that information when necessary to render it complete and accurate. If a consumer notifies a mortgage servicer that credit information reported to a CRA is inaccurate, at an address specified by the servicer for such notices, and the information is in fact inaccurate, the amended FCRA requires the servicer to thereafter report the correct information to the CRA.
In addition, if a CRA notifies a mortgage servicer that a consumer disputes the completeness or accuracy of any information reported to the CRA, the servicer cannot subsequently report that information to a CRA without providing notice of the dispute. Upon receiving notice of the consumer's dispute, the servicer must investigate and review all relevant information provided by the CRA, including information transmitted to the CRA by the consumer, and report the results of its investigation all within 30 days of the date the CRA receives the consumer's notice (or 45 days if the consumer later provides relevant additional information to the CRA). As a result, the servicer may have very little time to complete its investigation and should consider utilizing automated communication links with its CRAs.
If a consumer voluntarily closes (pays off) their mortgage loan account, the servicer
must report this fact at the time of its regularly scheduled CRA reporting date. Also,
where a mortgage servicer references a delinquent mortgage loan to a CRA, the servicer
must now also furnish, within 90 days after the report is made, the date of the
commencement of the delinquency.
These new duties are further outlined in a form Notice to Furnishers of Information
released on July 1, 1997 by the Federal Trade Commission. You may obtain copies by
retrieving the Federal Register for that day or by dialing into the FTC's Internet website
(http://www.ftc.gov).
In addition, these new FCRA provisions preempt any state or local law purporting to impose duties on furnishers of credit information to CRAs, except for the laws of California (Section 1785.25(a) of the CA Civil Code) and Massachusetts (Section 54A(a) of Ch.93 Mass. Ann. Laws) on this subject.
ACTING ON INFORMATION OBTAINED THROUGH CREDIT REPORTS
Because the FCRA was enacted to protect consumers from the act of credit bureaus, it historically placed few requirements on the users of credit reports, except to provide consumers with adverse action notices citing reliance on credit bureau information. The amended FCRA has expanded the list of information which must now appear on such adverse action notices to include: (i) the telephone number of the CRA that provided the report (including a toll free telephone number if it is a nationwide CRA), (ii) a statement that the CRA did not make the adverse decision; (iii) notice of the consumer's right to obtain a free copy of the report from the CRA upon request within 60 days; and (iv) notice of the consumer's right to dispute with the CRA the accuracy or completeness of any information in the report. To ensure flexibility and to accommodate electronic communications, the amended FCRA allows these adverse action notices to be given in writing, orally, or by electronic means. Again, the Federal Reserve Board has amended its model ECOA adverse action notices to comply with these new FCRA requirements.
In addition, the amended FCRA has expanded on its general requirement that all users of consumer credit reports must have a "permissible purpose" by requiring users to now affirmatively certify to the CRA (by a general or specific certification, as appropriate) the FCRA-authorized purpose(s) for which the report is being obtained and that the report will not be used for any other purpose.
The Federal Trade Commission released a new form Notice to Users of Consumer Reports in its July 1, 1997 publication outlining these new requirements which may be retrieved through the Federal Register for that day or through the FTC's Internet website (http://www.ftc.gov).
These FCRA provisions preempt all state and local laws regarding the responsibility of creditors that take adverse action in connection with consumer loan applications.
LIABILITY FOR NONCOMPLIANCE
Servicers who fail to violate FCRA provisions, including the new amendments, are at risk of private party litigation as well as administrative enforcement action.
When noncompliance is willful, the servicer may be liable to a private party litigant
in an amount equal to any actual damages sustained up to $1,000, plus punitive damages and
costs, including attorney's fees. For negligent noncompliance, the servicer may be liable
to a private party litigation in an amount equal to any actual damages sustained, plus
costs and attorney's fees.
Servicers are also subject to administrative enforcement actions (civil penalties) brought
by Federal or state regulatory agencies for noncompliance with the FCRA. The FCRA also
establishes criminal penalties for officers and employees of servicers functioning as a
CRA who "knowingly and willfully" give information from the servicer's files to
unauthorized persons, as well as on those who "knowingly and willfully" obtain
consumer credit information under false pretenses.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies and credit unions. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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