If legal or factual disputes must be resolved before deciding whether a private student loan was excepted from discharge under Section 523(a)(8)(A)(i), there is no violation of the Fair Credit Reporting Act (FCRA) if the credit reporting agency shows the debt to be outstanding, according to the Second Circuit.
The January 4 opinion by Circuit Judge Alison J. Nathan limits the practical significance of Homaidan v. Sallie Mae Inc., 3 F.4th 595 (2d Cir. July 15, 2021), where the Second Circuit held that private student loans are not excepted from discharge under Section 523(a)(8)(A)(ii). The only subset of private student loans excepted automatically from discharge are those falling under Section 523(a)(8)(B). To read ABI’s report on Homaidan, click here.
Cutting through the legal gibberish, the opinion could be read to mean that a credit reporting agency can show private student loans as not having been discharged without liability under the FCRA, 15 U.S.C. § 1681 et seq. However, credit reporting agencies may choose to be more circumspect, because Judge Nathan’s opinion lists circumstances in which the facts and law could be sufficiently clear to result in liability for a faulty credit report.
Judge Nathan said that a student loan debtor “is not without options.” She noted how the debtor could dispute the debt with the reporting agency, which, she said, “knows the nature of the loan program better than anyone else.” Or, the debtor could obtain a clarification about discharge from the bankruptcy court.
The Student Loan at Issue
The debtor took down an $18,000 loan from a private, for-profit corporation to attend a theological seminary. Because the school was not a Title IV institution, the debtor was not eligible for Stafford loans or other federal student aid.
The debtor received a bankruptcy discharge in 2013 and was immediately told by the servicer that the loan had not been discharged. In fact, the debtor signed a loan-modification agreement with the servicer and made payments for four years.
The servicer notified the credit reporting agency about the loan modification, noting that the debt was about $20,000 and that some $8,500 was past due.
Without filing a dispute with the reporting agency, the debtor sued the reporting agency in federal district court in New York a year or two after the last payment was made, alleging an FCRA violation. The district court granted the reporting agency’s motion for summary judgment.
Despite what Judge Nathan said were disputed facts, the district court ruled that the debt had not been discharged, relieving the reporting agency of liability. The district court made its decision almost one year before the Second Circuit handed down Homaidan. The debtor appealed, leading Judge Nathan to affirm on other grounds.
The FCRA’s Requirements
The standard for liability is contained in Section 1681e(b) of the FCRA, which says that credit reporting agencies “shall follow reasonable procedures to assure maximum possible accuracy of the information.”
The debtor contended that the loan was not exempted from discharge under Section 523(a)(8)(A)(i), because it was not “made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.” For Judge Nathan, there was a factual dispute about whether the loan was funded “under any program funded in whole or in part by” by the government or a nonprofit institution.
Rather than resolve the factual issues like the district court, Judge Nathan affirmed “on the alternative ground that the legal inaccuracy alleged in this case is not cognizable under the FCRA.”
Beyond the dispute about the type of “program” under which the loan was made, Judge Nathan found a need for interpreting Section 523(a)(8)(A)(i). She cited Homaidan for having rejected the idea that virtually all student loans are nondischargeable.
In addition, Section 1681e(b) of the FCRA requires reporting agencies to “follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” She noted that “accuracy” is not defined in the statute.
Since there was no bankruptcy court order “explicitly discharging” the student loan, Judge Nathan said that the inaccuracy alleged by the debtor “does not meet this statutory test because it evades objective verification.”
Focusing on the language of the FCRA, Judge Nathan said that the statute “does not require credit reporting agencies to adjudicate legal disputes such as the post-bankruptcy validity of [the debtor’s] educational loan debt.” Furthermore, she found a legal dispute about whether the loan was nondischargeable under Section 523(a)(8)(A)(i).
That “unresolved legal question,” Judge Nathan said, “renders [the debtor’s] claim non-cognizable under the FCRA.”
In sum, Judge Nathan held that “the post-bankruptcy validity of [the debtor’s] debt means that its status is not sufficiently objectively verifiable to render [the debtor’s] credit report ‘inaccurate’ under the FCRA.”
Judge Nathan cited four other circuits for having held that “inaccuracies that turn on legal disputes are not cognizable under the FCRA.”
Judge Nathan did not give reporting agencies a broad get-out-of-jail-free card. The opinion, she said, “does not mean that credit reporting agencies are never required by the FCRA to accurately report information derived from the readily verifiable and straightforward application of law to facts.”
For example, she said that once a legal question is “sufficiently settled so that the import on a particular debt is readily and objectively verifiable, the FCRA sometimes requires that the implications of that decision be reflected in credit reports.”
“What the FCRA does not require, however, is that credit reporting agencies resolve unsettled legal questions like the one at issue here,” Judge Nathan said.
Before affirming the district court on other grounds, Judge Nathan listed some of the debtor’s options: lodging a dispute with the reporting agency, and obtaining a declaration from the bankruptcy court regarding the discharge of the debt.
If legal or factual disputes must be resolved before deciding whether a private student loan was excepted from discharge under Section 523(a)(8)(A)(i), there is no violation of the Fair Credit Reporting Act (FCRA) if the credit reporting agency shows the debt to be outstanding, according to the Second Circuit.
The January 4 opinion by Circuit Judge Alison J. Nathan limits the practical significance of Homaidan v. Sallie Mae Inc., 3 F.4th 595 (2d Cir. July 15, 2021), where the Second Circuit held that private student loans are not excepted from discharge under Section 523(a)(8)(A)(ii). The only subset of private student loans excepted automatically from discharge are those falling under Section 523(a)(8)(B).
Cutting through the legal gibberish, the opinion could be read to mean that a credit reporting agency can show private student loans as not having been discharged without liability under the FCRA, 15 U.S.C. § 1681 et seq. However, credit reporting agencies may choose to be more circumspect, because Judge Nathan’s opinion lists circumstances in which the facts and law could be sufficiently clear to result in liability for a faulty credit report.