Following nonjudicial foreclosure, a lender’s failure to report a deficiency as having been “abolished” (or discharged) establishes “inaccuracy” and opens the door to the “furnisher’s” liability under the federal Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., according to the Ninth Circuit.
Although the deficiency may still survive in some existential sense after nonjudicial foreclosure or discharge in bankruptcy, the Ninth Circuit is saying in its May 16 opinion that a lender is barred from mounting a lawsuit or reporting the debt as outstanding. On the other hand, the Supreme Court held 5/3 in Midland Funding LLC v. Johnson, 137 S. Ct. 1407, 197 L. Ed. 2d 790 (2017), that a debt collector who files a proof of claim that is “obviously” barred by the statute of limitations has not engaged in false, deceptive, misleading, unconscionable, or unfair conduct and thus does not violate the federal Fair Debt Collection Practices Act. To read ABI’s report on Midland Funding, click here.
So, is the Ninth Circuit on thin ice? If a lender can file a proof of claim based on a time-barred debt and not violate the FDCPA, why is there an FCRA violation when the lender reports that the debt remains outstanding?
Does the inconsistency between the two opinions result from the courts’ differing views about consumer protection laws, or do the factual distinctions justify the differing outcomes?
The Nonjudicial Foreclosure
An individual bought a home in Arizona in 2007 that crashed in value a few years later. The owner lost the home in a nonjudicial foreclosure in 2013.
The home had two mortgages. The foreclosure sale barely covered the first mortgage.
Several years later, the former owner was unable to obtain a mortgage for purchasing a new home because the lender on the foreclosed second mortgage was reporting that the debt was unpaid, outstanding and in default.
The former owner filed a written dispute with a national credit reporting agency, stating that the debt had been “abolished” by Arizona law. Indeed, Circuit Judge M. Margaret McKeown said in her opinion for the Ninth Circuit that the Arizona Supreme Court had held under the state’s Anti-Deficiency Statute that nonjudicial foreclosure “abolish[es]” a borrower’s personal liability.
The former owner filed a second dispute with the reporting agency after the lender continued to report the deficiency as outstanding. After the second dispute, the lender reported the debt as “charged off,” an inaccuracy in itself.
The former owner then sued the lender under the FCRA for providing inaccurate information. The district court dismissed the suit on motion for summary judgment, believing that the reports were accurate as a matter of law. The owner appealed to the circuit.
The Reports Were Inaccurate, as a Matter of Law
To prove a claim under the FCRA against a so-called furnisher like the second-mortgage lender, Judge McKeown said that a consumer must first make a prima facie case demonstrating that the report was inaccurate. Then, the consumer must show that the furnisher did not follow “reasonable procedures” to ensure the “maximum possible accuracy.”
Citing the Arizona Supreme Court’s interpretation of the state’s Anti-Deficiency Statute, Judge McKeown said that the former owner’s liability for a deficiency on the foreclosed second mortgage had been “abolished.” She then held that the former owner “was no longer obligated to repay the debt.”
Therefore, Judge McKeown said, “It was ‘patently incorrect’ for [the lender-furnisher] to report otherwise.”
Of significance in bankruptcy circles, Judge McKeown said that abolishing the debt under the state statute “was no different than” a discharge of a personal liability in bankruptcy under Section 524(a)(1).
For Judge McKeown, the question was not whether the debt had been entirely extinguished, as the district court had ruled. Rather, she said, “no outstanding balance existed, because the statute abolished his personal liability.”
Judge McKeown therefore held that the former owner had “more than satisfied” his burden of showing prima facie inaccuracy.
Next, Judge McKeown addressed the question of whether the lender had conducted a reasonable investigation. Providing guidance for the district court on remand, she said that an investigation by a lender “will often be more extensive and more thorough” than an investigation by a reporting agency.
In fact, Judge McKeown said, lenders will “sometimes” be required to “resolve” questions of “legal significance.”
Because there were genuine factual disputes about the lender’s investigation, Judge McKeown reversed and remanded for further proceedings or a trial regarding the sufficiency of the lender’s investigation.
Taggart Questions
There is tension between the outcome in Midland Funding and the new case from the Ninth Circuit. But there is more.
In Taggart v. Lorenzen, 139 S. Ct. 1795, 1809 (2019), the Supreme Court held that there can be no sanctions for civil contempt of the discharge injunction if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”
Had the Ninth Circuit applied Taggart to the FCRA, the lender surely would have had a solid defense given that the debt under Arizona law continued to exist but was unenforceable.
Judge McKeown did not discuss Taggart. Was it error?
This writer submits there was no error. The discharge injunction contains no statutory standards for contempt, so the Supreme Court in Taggart applied common law notions of contempt.
Suits under the FCRA do not entail contempt. Rather, the FCRA sets up its own unique thresholds that must be met before imposing liability.
Although Taggart and the case in the Ninth Circuit can be reconciled, the same can’t be said for Midland Funding and the Ninth Circuit opinion. Moreover, the Supreme Court will sometimes erect nonstatutory barriers to the enforcement of consumer protection laws by invoking federal common law using the doctrine of prudential standing. See, e.g., Spokeo Inc. v. Robins, 136 S. Ct. 1540 (2016); and TransUnion LLC v. Ramirez, 20-297 (Sup. Ct. June 25, 2021).
To read ABI’s reports on Spokeo and TransUnion, click here and here.
This writer submits there is a fundament difference between the Ninth Circuit and the Supreme Court when it comes to consumer protection. We leave it for the reader to decide which court has the better approach.
Following nonjudicial foreclosure, a lender’s failure to report a deficiency as having been “abolished” (or discharged) establishes “inaccuracy” and opens the door to the “furnisher’s” liability under the federal Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., according to the Ninth Circuit.
Although the deficiency may still survive in some existential sense after nonjudicial foreclosure or discharge in bankruptcy, the Ninth Circuit is saying in its May 16 opinion that a lender is barred from mounting a lawsuit or reporting the debt as outstanding. On the other hand, the Supreme Court held 5/3 in Midland Funding LLC v. Johnson, 137 S. Ct. 1407, 197 L. Ed. 2d 790 (2017), that a debt collector who files a proof of claim that is “obviously” barred by the statute of limitations has not engaged in false, deceptive, misleading, unconscionable, or unfair conduct and thus does not violate the federal Fair Debt Collection Practices Act. To read ABI’s report on Midland Funding, click here.
So, is the Ninth Circuit on thin ice? If a lender can file a proof of claim based on a time-barred debt and not violate the FDCPA, why is there an FCRA violation when the lender reports that the debt remains outstanding?
Does the inconsistency between the two opinions result from the courts’ differing views about consumer protection laws, or do the factual distinctions justify the differing outcomes?