by Erich Paetsch, Chair, Financial Services Industry Group
Recently, the Ninth Circuit Court of Appeals in Gross v. CitiMortgage considered the extent to which financial institutions furnishing consumer credit information to reporting agencies must investigate consumer disputes. The Court reaffirmed an earlier decision that requires “furnishers” to conduct investigations that must be at least “reasonable” and “non-cursory.” It emphasized that reasonableness might require application of law.
In 2007, Marshall Gross purchased a single-family home in Arizona. To make the purchase, Gross financed 100% of the home’s purchase price by borrowing eighty percent secured by a senior mortgage and borrowing the twenty percent down payment secured by a junior mortgage. By 2012, Gross became unable to make his payments and defaulted on both loans. His home was sold at a trustee sale but only for an amount sufficient to cover the senior mortgage. CitiMortgage, which had purchased the junior loan, lost its investment entirely.
Arizona’s Anti-Deficiency Statute, abolished Gross’s remaining debt to CitiMortgage. The statute provides that no action may be maintained to recover any difference between the amount obtained in a foreclosure sale and the amount of indebtedness. Legally, Gross no longer had an obligation to repay the debt to CitiMortgage. Despite this, CitiMortgage continued to report Gross’s junior mortgage as past due to credit agencies, showing a string of missed payments, accruing interest, and late fees. Essentially, CitiMortgage failed to apply Arizona law to Gross’s particular debt.
Gross disputed CitiMortgage’s reporting with TransUnion in February of 2018. TransUnion notified CitiMortgage of the dispute. In response, CitiMortgage updated Gross’s account to show he was further behind on the payments and that the amount past due had grown. Gross then disputed the debt with both Experian and TransUnion again in May of 2018. Only then did CitiMortgage change the mortgage balance to zero and note it had charged the debt off. Gross sued CitiMortgage under the Fair Credit Reporting Act (FCRA).
The Ninth Circuit noted that the FCRA requires furnishers to correct or delete inaccurate information after investigating with respect to the disputed information. It said that a furnisher’s duties, while similar to those of a credit reporting agency, require investigatory obligations that are often more extensive and thorough. Furnishers have a direct relationship with the consumer and stand in a better position to make a thorough investigation of the disputed debt. This means furnishers will sometimes be required to investigate, highlight, or even resolve questions of legal significance.
The Ninth Circuit ultimately found CitiMortgage’s original reporting of Gross’s remaining obligation on the junior mortgage to be “patently incorrect.” However, the court also concluded that the reasonableness of CitiMortgage’s investigation was a question of fact for a jury. The court remanded the case to the District Court to make the reasonableness determination.
Where does this leave financial institutions that furnish consumer credit information to credit agencies? While it is unclear what constitutes a reasonable investigation, what is clear is that by failing to consider applicable laws to consumer debts, financial institutions might leave behind incorrect reporting that could expose them to potential claims under the FCRA.
Erich Paetsch is a partner in the Creditor’s Rights and Bankruptcy Practice Group and chair of the Financial Services Industry Group. The information in this article is not intended to provide legal advice. For professional consultation, please contact Erich at Saalfeld Griggs PC. 503.399.1070. © 2022 Saalfeld Griggs PC