Court Finds that Post-Discharge Credit Inquiries Do Not Violate Fair Credit Reporting Act

The Ninth Circuit Court of Appeals recently held that a mortgage servicer has a permissible reason for pulling consumer reports of three borrowers for whom the company had serviced two mortgages despite the borrowers’ personal liability for the mortgages being discharged in bankruptcy. More particularly, the servicer was granted the right to access the borrowers’ consumers’ reports to evaluate them for loss mitigation.

The borrowers each owned homes that were subject to mortgages maintained by the servicer. Each of the borrowers had filed for bankruptcy and received a discharge of personal liability under their mortgages. Following these dischargers, the mortgage service obtained the borrowers’ credit reports. The borrowers argued that the mortgage service had willfully violated the Fair Credit Reporting Act by obtaining consumer reports without a permissible purpose. 

The United States District Court for the District of Nevada granted the mortgage servicer’s motion for summary judgment, and in doing so relied on a previous Ninth Circuit decision. This earlier case involved a borrower whose personal liability on a mortgage was discharged in bankruptcy and a mortgage servicer who later accessed the borrower’s credit report. The servicer argued that it had a permissible purpose to obtain the report because the Fair Credit Reporting Act permits consumer reporting agencies to furnish reports to a person whom the agency has reason to believe intends to use the data in connection with a credit transaction involving the consumer or review collection of one of the consumers’ accounts. The Ninth Circuit assumed that the mortgage service lacked a permissible purpose to obtain the report, but affirmed the decision to do so because it could not establish that the borrower’s conduct violated the Fair Credit Reporting Acting. 

Based on similar facts, in this case, a district court found that the mortgage could not have willfully violated the Fair Credit Reporting Act and consequently granted a motion for summary judgment. Following an appeal, the Ninth Circuit affirmed the district court’s decision. Rather than follow the earlier decision, which found that the mortgage servicer had violated the Fair Credit Reporting Act but that any potential violation was not willful, the court addressed the issue of whether the mortgage servicer violated the Fair Credit Reporting Act. The mortgage servicer argued that it had a permissible purpose to examine credit reports because the company was using the borrowers’ credit reports to assess loss mitigation options. The borrowers argued that because they had both vacated and surrendered their homes before the mortgage service’s credit inquiries, and because they had never expressed any interest in avoiding foreclosure, the mortgage servicer lacked a permissible purpose. In rejecting these arguments, the majority found that nothing required a consumer to affirmatively request a foreclosure alternative before a mortgage servicer could review an account to determine eligibility. Additionally, the court found that the discharge injunction in the United States bankruptcy code excepts it from a secured creditor’s efforts to seek periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce a lien. The majority then found that the mortgage servicer had articulated a permissible purpose to access a borrowers’ consumer reports.

Lessons for Mortgage Services

Mortgage services in the Ninth Circuit, including those in California, should take some ease in the court’s ruling that mortgage services still have a permissible purpose for accessing borrower’s consumer reports even if a borrowers’ personal liability on a mortgage is discharged. Mortgage services, however, should stay alert to limitations on this purpose and should also consider adopting a policy to limit credit inquiries for loss mitigation accounts where a borrower informs the servicer that he or she is not interested in pursuing loss mitigation options. 

Lessons for Mortgage Borrowers

Mortgage borrowers should remember that the Fair Credit Reporting Act regulates credit reports. This Act requires that people who access, obtain, or use credit reports have a permissible reason for doing so. Some of the various permissible reasons why parties might include the following situation:

• Creditors and lenders with whom you are applying for credit 
• Debt collection companies that use the report for collecting payment
• Employers or prospective employers who have your permission
• Existing creditors with whom a person has a relationship
• Insurance carriers who want to underwrite insurance
• Lenders who desire applicants to prequalify for credit or insurance

Some examples of what qualifies impermissible use of a credit report include:

• Obtaining a credit report to determine if a person is collectible before filing a lawsuit against the individual on an involuntary debt or other non-credit related issues
• Obtaining a credit report as an employer without a worker’s permission
• Obtaining a credit report as a creditor on a debt that was discharged in bankruptcy to examine a person’s current financial situation 

When someone inquires into a person’s credit impermissibly, this can end up damaging a person’s credit report in several ways. First, too many credit inquiries can damage a person’s credit as well as lower than the individual’s credit score. This decrease in a person’s credit score can lead to additional difficulty with credit scores. Additionally, impermissible credit report access constitutes a breach of a person’s privacy. After all, a third party has gained access to a person’s confidential and sensitive information without a legally recognized purpose.

Fortunately, the Fair Credit Reporting Act provides consumers whose credit reports are impermissibly accessed with remedies. Negligent actions by creditors who obtain credit reports can result in the collection of actual damages as well as attorneys’ fees and costs. If access to the reports is accomplished willfully, the party who obtains the reports can also be liable for statutory damages of up to $1,000 and punitive damages. In some cases, consumers can join together in a class action to make sure that an unauthorized third party stops its unlawful practice.

Speak with a Knowledgeable Bankruptcy Attorney

If you have questions about how bankruptcy will impact your mortgage or any other aspect of the homeownership process, it can help to speak with an experienced attorney. Contact attorney Melanie Tavare today to schedule a free case evaluation.