Don't Bet the Business

The basic facts are these: 

A borrower signs a note and mortgage on a personal residence. A borrower defaults on a loan and later files for Chapter 7 bankruptcy protection, through which any personal obligation on the note is discharged. 

Having never reaffirmed the mortgage loan debt, the borrower, nonetheless, continues to make monthly payments to the lender to hopefully avoid a foreclosure of the remaining security interest on the property. However, in reports to consumer credit reporting agencies, the lender does not disclose the voluntary payment and, instead, reports the loan account as closed with a zero balance and with no activity on the account.

The borrower, upon discovering the absence of any payment notations his credit report, notifies the major credit bureaus of the omission, claiming that his credit report is wrong. When the lender is told of this dispute it investigates the claim but continues to insist that its reporting is accurate. 

Unsatisfied, the borrower sues, alleging claims against the lender for negligent and willful violations of the Fair Credit Reporting Act, 15 U.S.C. § 1681s-2 (FCRA). Did the lender need to worry? It turns out the answer is a fairly logical “no.”

All can agree that the FCRA “exists ‘to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.’” Boggio v. USAA Fed. Saving Bank, 696 F.3d 611, 614 (6th Cir. 2012). Toward that end, §1681s-2 of the FCRA imposes a duty on any entity providing information about a consumer’s credit history to the bureaus – such as the lender in this example – upon receiving a consumer dispute over the accuracy or completeness of the reporting, to investigate and, if needed, to correct the report.  To be sure, the FCRA provides a private cause of action to a borrower against a lender that fails to comply with §1681s-2.

So what about the borrower’s FCRA claim here? The Court in Groff v Wells Fargo Bank, Case No. 14-12250 (E.D. Mich., May 8, 2015), concluded that, consistent with the two other federal courts that had reviewed the same question, a lender does not violate § 1681s-2 of the FCRA by reporting a borrower’s mortgage loan account that was discharged in bankruptcy as closed, with no balance, and no payments made after the date of discharge – even when voluntary payments are made and accepted. 

A bit surprising, you think, given the voluntary payments? Not really. As the Groff Court found, there simply is nothing false or “inaccurate” about a lender’s credit reporting of a mortgage loan account as being closed, with a zero balance when, if fact, after the bankruptcy discharge the account was closed with a zero balance.

Indeed, the borrower did not dispute that his personal obligation to pay the note was discharged. The borrower also never claimed that the lender had tried to compel him to make further payments, or that he would have had any obligation to do so. Simply, the debt was wiped out in the bankruptcy and the lender said so in its reporting.

While the borrower claimed that having continued to accept the voluntary payments and credit them toward a “declining loan balance” raised a question of fact as to whether a new relationship arose between the parties, the court was not persuaded. Rather, the court concluded that there simply was no question about the status of the parties’ relationship as creditor and debtor after the bankruptcy discharge: “there was none.” 

Accordingly, even though the lender accepted the borrower’s voluntary payments and opted not to foreclose its security interest, that did not establish any relationship between the parties other than as a property owner and a lien holder with claims to the same property.

Indeed, overlooked by the borrower, but not by the court, was the fact that any credit report of voluntary payments relating to the discharged mortgage loan might suggest that the lender was improperly attempting to collect money from the borrower to satisfy a previously discharged debt. Such reporting, itself, could be viewed as inaccurate, or even intentionally false under the FCRA, “because it would not accurately and completely reflect the truth that the plaintiff’s debt had been extinguished.”

The moral of this story is quite straightforward: lenders that report consistent with the facts as they occur will likely not stray outside of the FCRA lines. Borrowers, on the other hand, having opted for the protections personal bankruptcy offer, cannot claim the same consumer rights under the FCRA as if the bankruptcy had never occurred.

When you make your bed, you most times have to sleep in it.