New Federal Requirements Will Impose Compliance Burdens on and Raise Litigation Risks for All Furnishers of Data to Consumer Reporting Agencies
Any entity which furnishes consumer information to consumer reporting agencies will be affected in important ways by final federal rules published on July 1, 2009. While the rules will not become effective until July 1, 2010, furnishers need to plan soon for the new compliance burdens and significant litigation risks raised by the regulations. Indeed, it is not too much to say that the regulations will usher in a wholly new, more tightly regulated and more risky era for those who furnish information to consumer reporting agencies.
The Fair Credit Reporting Act (FCRA) governs the reporting of information by businesses to consumer reporting agencies. In FCRA parlance, businesses reporting information are known as “furnishers,” and consumer reporting agencies are commonly referred to as “CRAs.” The FCRA requires generally that the information furnishers report to CRAs be accurate. A breach of this general duty, however, does not give rise to a consumer lawsuit under the FCRA, but rather to enforcement actions by regulatory agencies. The Federal Trade Commission (FTC) has been active in this area. However, the FCRA also requires, again using general language, that furnishers investigate disputes when consumers make complaints to CRAs that are then forwarded to the furnishers. If the furnisher fails to conduct a reasonable investigation of a dispute routed through the CRA, the furnisher can be sued under the FCRA for actual, statutory damages ($100-$1,000 per violation) and punitive damages (which can be substantial), plus attorneys’ fees. Plenty of successful lawsuits have been based on the furnisher’s FCRA duties in handling disputes routed through CRAs, and the courts have been gradually developing, on a case-by-case basis, more specific rules for complying with the duty to investigate disputes.
In 2003, Congress amended the FCRA directing the Federal bank regulatory agencies and the FTC, first, to develop guidelines to be used by furnishers to ensure the “accuracy” and “integrity” of information provided by the furnishers to CRAs, and, second, to specify the circumstances under which a furnisher would be required to investigate a complaint submitted by a consumer directly to the furnisher. Congress, therefore, desired that more detail be given to the general duty to report accurate information and a new duty be imposed to investigate disputes submitted by consumers directly to furnishers.
Final regulations by six federal agencies – FDIC, FTC, Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Federal Reserve), the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) – were published on July 1, 2009, with an effective date of July 1, 2010, and can be accessed through this link. Because of the FTC’s participation in this joint regulatory action, the regulations will cover not only banks, thrifts and credit unions, but also most anyone who furnishes data to CRAs.
First, the regulations require written policies and procedures to ensure the “accuracy” and “integrity” of initial credit reporting. A detailed list of elements that should be included in a written policy are set forth in the final regulations, including: standards for the maintenance of records, methods of providing information to CRAs, internal controls including sampling and testing of reported data, training guidelines, and procedures for conducting a “reasonable investigation” of direct disputes. Furnishers that do not have a written policy will need to create one; furnishers with a policy will need to review and, if necessary, update their policies to ensure compliance with the new requirements.
Second, the regulations impose specific duties for investigating and responding to customer disputes that are submitted by consumers directly to furnishers, which duties presumably should become part of the written policy established pursuant to the “accuracy” and “integrity” prong of the regulation. Those furnishers who lack such procedures will need to establish them; furnishers who have established procedures will need to review and, if appropriate, modify their procedures to ensure compliance with the requirements of the regulations.
The regulations by themselves, therefore, dramatically change the legal landscape associated with reporting information to CRAs. However, the regulations, albeit indirectly, also increase litigation risks.
The regulations purport to address activities for which there is no private right of action for a consumer. However, the regulations will require all furnishers to establish formalized procedures for investigating complaints submitted directly by consumers, and the regulations provide detail on what those procedures must include. Plaintiffs’ lawyers who sue furnishers for failing to properly investigate a dispute routed through CRAs almost invariably seek all of the furnisher’s FCRA policies, searching for inadequacies in the policies or non-compliance with those policies. Plaintiffs’ attorneys will argue that the policies and procedures for handling direct complaints effectively establish a de facto minimum standard of conduct by furnishers in handling a dispute routed through the CRAs. Plaintiffs’ lawyers will argue that any deviation between the furnisher’s own written policy and the actual handling of dispute establishes, ipso facto, at least negligence or perhaps even willful misconduct. From a litigation perspective, the worst of all worlds for a furnisher may be having a quality set of policies and procedures that are not followed. On the other hand, having and following reasonable policies and procedures could be useful defensively. Policies need to be established or revised with compliance in mind, and vice versa, all with an eye to this litigation risk.
Accordingly, furnishers will need to review carefully their current written policies and procedures in conjunction with the requirements of the final regulations, make any necessary modifications to their policies to ensure compliance with the new requirements, put into place a compliance program, and ensure that these policies are updated appropriately.
Troutman Sanders attorneys have deep and broad experience in compliance and litigation under the FCRA, including the practical aspects of furnishers’ obligations under the FCRA, and would be pleased to discuss the implications of the new regulations.