A law firm hired to foreclose on a property was not required under the Fair Debt Collection Practices Act (FDCPA) to inform a credit reporting agency of erroneously negative credit reports on the borrower, even if the firm was aware of the mistake, the U.S. Court of Appeals for the 10th Circuit held in a recent ruling.
In Llewellyn v. Allstate Home Loans, et al., the borrower, when refinancing his loan, failed to inform the closing agent that the servicing rights to the loan had been transferred. Accordingly, the closing agent wired payoff funds to the original servicer, and the borrower stopped making payments.
When the second servicer did not receive the borrower's monthly payments, it made negative credit reports to a credit reporting agency and hired a law firm to initiate foreclosure proceedings. Eventually, the law firm and second servicer determined what had occurred, and the original servicer forwarded the payoff funds to the second servicer. The second servicer and the law firm, however, did not take any action to remove the negative credit reports for several more months.
The borrower subsequently filed an action containing various allegations, including that the second servicer and law firm violated the FDCPA by failing to reverse the credit reports despite the second servicer's acknowledgment that the reports were made in error. The borrower also alleged that the second servicer willfully violated the Fair Credit Reporting Act (FCRA).
The 10th Circuit partially reversed the district court's grant of summary judgment in favor of the second servicer on the borrower's FCRA claims but affirmed its grant of summary judgment in favor of the second servicer and the law firm on the FDCPA claims. Most significantly, the court held that the law firm's failure to notify the credit reporting agency that the debt was disputed or take steps to reverse the negative credit reports did not constitute an FDCPA violation. Although the law firm was aware that the negative credit reports had been made in error, it had never reported the debt to a credit reporting agency, the court found. Concurring with the Eighth Circuit's 2008 opinion in Wilhelm v. Credico, Inc., the court concluded that the firm was neither obligated to inform the agency of the dispute nor under any affirmative duty to reverse the negative reports.
The court also dispensed with the borrower's FDCPA claims against the second servicer. It held that, because the borrower's loan was not in default at the time it was obtained by the second servicer, the second servicer was not a "debt collector" within the meaning of the FDCPA.
On the FCRA claims, the second servicer argued that the borrower did not provide sufficient evidence of damages to survive summary judgment. The 10th Circuit disagreed, holding that although the borrower failed to provide sufficient evidence to support his claims of economic damages, his own affidavit regarding his deteriorated health and depression was sufficient to create a genuine dispute as to whether the servicer's actions caused him emotional damages. The court further held that summary judgment was not appropriate on whether an FCRA violation had occurred. The 10th Circuit found there was a "genuine dispute of fact" as to whether the servicer's reporting of the borrower's non-payment without also reporting the underlying dispute created a "materially misleading impression" in violation of FCRA.
The 10th Circuit did agree with the district court's grant of summary judgment in favor of the second servicer on the plaintiff's claim that the servicer's alleged FCRA violation was "willful." According to the 10th Circuit, the servicer's delay in removing the negative credit reports did not rise to the level of an "intentional violation" or a violation in "reckless disregard of its [FCRA] duties" as required for recovery of statutory or punitive damages by the FCRA's willful violation provision.