Fair Credit Reporting Act

Mike King
February 8, 2011 — 2,873 views  
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Question: The Fair Credit Reporting Act allows me to pull a credit report on a debtor any time I am collecting a debt, doesn't it?

Answer: Not necessarily, because the Fair and Accurate Credit Transactions Act makes it clear that debt collection is a permissable purpose for obtaining credit reports only in connection with credit transactions in which consumers have participated directly and voluntarily.

So, what do you do if the buyer of your real estate bounces the deposit check, defaults on the contract, and causes you to miss a legitimate sale?  Or, what do you do if your renovation contractor is six months behind schedule, never finishes the work and costs you a full year of rental income?  Is it worth suing these deadbeats for your damages?  Often, people would check the credit report of the offending party to decide whether a lawsuit would be worthwhile or would simply be throwing good money after bad.  Now getting the credit reports on the deadbeats may not be such a great idea.

Most creditors have instituted policies and procedures concerning compliance with the Fair Credit Reporting Act in obtaining credit reports from credit bureaus when they are considering advancing credit to potential customers.  Generally, the debt collection industry has assumed that it can always pull credit reports for purposes of debt collection because debt collection was a recognized permissible purpose for obtaining credit bureau reports on consumers under the Fair Credit Reporting Act.  The Ninth District Court of Appeals blew a hole in that complacent assumption in September, 2007 with its decision in Pintos v. Pacific Creditors Association.

Plaintiff, Maria Pintos, seemingly had a bad year in 2002.  For some reason, the vehicle registration on her sport utility vehicle had expired.  On May 29, 2002, police officers found the vehicle with the expired registration parked on a street in San Bruno, California.  The police had P&S Towing tow and store the vehicle.  P&S Towing obtained a lien and sold the vehicle when Ms. Pintos failed to reclaim it or pay the towing and storage charges.  Not only did Ms. Pintos lose her vehicle, but the sale price did not cover the amount owed to the towing company and it obtained a deficiency claim against her which it assigned to Pacific Creditors Association, a collection agency. 

Pacific Creditors Association began collection efforts against Ms. Pintos and obtained a credit report on her from Experian Information Systems, Inc. on December 5, 2002.  Somehow, Ms. Pintos found out that Pacific Creditors Association had obtained her credit report and she sued Pacific Creditors Association and Experian under the Fair Credit Reporting Act.   Ms. Pintos said that Pacific Creditors Association violated the Act by obtaining her credit report without any proper purpose under the Act.  She said that Experian was liable to her for providing her report to Pacific Creditors Association. 

In federal district court, Pacific Creditors Association got the case thrown out because the judge agreed that it had a permissible purpose for obtaining the credit report on Ms. Pintos because it was seeking to collect a debt.  Experian got the judge to throw out the case because it claimed it had fulfilled its obligations by obtaining a certification from Pacific Creditors Association that it would only use the report for permissible purposes.  Seems like things were getting worse and worse for Ms. Pintos, but then she appealed the district court ruling to the Ninth Circuit Court of Appeals. 

The Court of Appeals decided that Ms. Pintos might have a case after all.  The Circuit Court noted that the Fair Credit Reporting Act "requir[es] credit reporting agencies to maintain reasonable procedures designed to assure maximum possible accuracy of the information contained in credit reports," and limits the access to credit bureau reports except for "certain statutorily enumerated purposes."  Importantly for Ms. Pintos, the court noted that the Fair Credit Reporting Act provides "a private right of action allowing injured consumers to recover any actual damages caused by negligent violations and both actual and punitive damages for willful non-compliance."

The court noted that the Fair Credit Reporting Act authorizes furnishing credit reports only for certain purposes, including "in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer."  But the Act does not allow all "account collection" as a permissible purpose for obtaining credit reports, according to the court.  Debt collectors are authorized to obtain credit reports on debtors only when collecting "in connection with a credit transaction involving the consumer."  The court said that the Fair and Accurate Credit Transactions Act of 2003 says that a "credit transaction" is a deal in which the consumer participates directly and seeks credit voluntarily.  "Not all ‘debt' involves a ‘credit transaction'."

The court reasoned that:

A consumer who chooses to initiate a credit transaction implicitly consents to the release of his credit report for related purposes.  By requiring this consent, Section 1681b(a)(3)(A) forges a "direct link" between a consumer's search for credit and the furnishing of his credit report. 

So in the Pintos case, Ms. Pintos did not seek credit voluntarily.  She really would have rather not had her vehicle towed away, impounded, and sold.  So the court said that Pacific Creditors Association had no purpose specified as a permissible purpose under the Fair Credit Reporting Act to obtain Ms. Pinto's credit bureau report.  "Because PCA obtained Pintos's credit report for debt collection efforts unrelated to a proper credit transaction, it violated the FCRA."  Ms. Pintos may seek actual damages and possibly punitive damages against Pacific Creditors Association in the trial court.

Experian tried to get out of the case by saying that it complied with the statute by requiring a certification from Pacific Creditors Association that it would only use credit reports for permissible purposes.  Pacific Creditors Association gave Experian a "blanket certification," promising that all of the credit reports it got from Experian would be used for permissible purposes.  The Ninth Circuit said that the Act requires that the credit bureau get more than just a "general promise to obey the law" from its customer.  The court said that "the reporting agency must make a ‘reasonable effort' to verify the certifications and may not furnish reports if ‘reasonable grounds' exist to believe that reports will be used impermissibly."  So Pacific Creditors Association's certification could not get Experian off the hook on its independent obligation to verify the certification and make sure that no reasonable grounds existed to suspect an impermissible use of the report.  The Ninth Circuit sent Experian back to the trial court to show that it was not liable for furnishing the reports to Pacific Creditors Association for impermissible purposes under the Act.

So why should you care about this restriction on the use of credit reports?  Well, anytime you obtain a credit report for a purpose not allowed under the Fair Credit Reporting Act, you face liability for actual and, perhaps, punitive damages.  One can imagine many situations when the person who owes you money did not voluntarily seek credit.  For example, you might not be able to pull the credit report on a guarantor of a lease or the guarantor of a car loan because the guarantors would not be the consumers who directly and voluntarily sought credit.  Or let's say that someone owes you money because they defaulted under a contract which did not involve that person voluntarily borrowing money from you.  You probably should not be obtaining credit bureau reports to see how you can collect from that person.

Once you start messing with people's privacy and with federal statutes involving credit reports, there can be many potential problems.  If you need advice and assistance to avoid these problems and to comply with appropriate statutes, please call me.

Mike King

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Michael R. King is a founding partner of Gammage & Burnham, P.L.C., a Phoenix law firm with diverse areas of emphasis. His practice primarily centers around bankruptcy and creditors' rights, commercial litigation, including uniform commercial code cases, and real estate and business law. Mr. King is a former of the Creditor/Debtor Rights Committee and is a current member of the Bankruptcy, Real Estate and Construction Law Sections of the State Bar of Arizona. He is the past chair of the Board of Trustees of the Maricopa County Bar Foundation. Mr. King is an active alumnus of The University of Arizona, where he received his B.A. and J.D. degrees, with distinction and high distinction.