“Reasonable reader” standard determines credit reports were not inaccurate under FCRA

Excerpted from a JD Supra Blog by Danile McKenna and Joel Tasca

The U.S. Court of Appeals for the Third Circuit has ruled that in determining whether a credit report is accurate or misleading under the Fair Credit Reporting Act’s “maximum possible accuracy” requirement, a district court should apply a “reasonable reader” standard.

Bibbs v. Trans Union LLC was one of three district court cases consolidated on appeal in which the plaintiff alleged that Trans Union had violated the FCRA requirements (1) in 15 U.S.C. Sec. 1681e(b) for a consumer reporting agency (CRA) to “assure maximum possible accuracy” in its credit reports, and (2) in 15 U.S.C. Sec. 1681i(a) for a CRA to “conduct a reasonable reinvestigation to determine whether information disputed by the consumer is inaccurate.”

The plaintiffs in each of the three cases had obtained student loans, with two of the plaintiffs having obtained their loans from the same lender. Following nonpayment by each of the plaintiffs, their respective lenders closed their accounts and transferred them. Once the loans were transferred, their account balances with the lenders immediately went to zero and all of their payment obligations were transferred. Each plaintiff’s credit report contained the same negative pay status notation: “Account 120 Days Past Due Date.”

It was undisputed that (1) the plaintiffs failed to make timely payments on their loans, (2) Trans Union accurately reported their accounts as late until the dates they were closed and the balances were transferred, and (3) the plaintiffs owed no balance to their previous creditors once the accounts were transferred.

Plaintiffs argued the negative pay status notations on their credit reports were inaccurate and could mislead creditors to incorrectly assume that the plaintiffs were currently more than 120 days past due. The plaintiffs’ lawyers sent letters to Trans Union disputing the accuracy of the credit reports in which they stated it was impossible for the plaintiffs’ current status to be listed as late when they owed no money to the previous creditors. Trans Union sent each plaintiff a report with the results of its investigation in which it explained that for accounts that have been closed and paid, the pay status represented the last known status of the account. Trans Union did not update or correct the information and instead stated the reports were correct.

The district court in each case granted Trans Union’s motion for judgment on the pleadings and dismissed the case without ordering further discovery. On appeal, the Third Circuit first considered whether it was correct for the district courts to use a “reasonable creditor” standard to determine whether Trans Union’s credit reports were misleading. The plaintiffs argued that even if the reports would not mislead a “reasonable creditor,” other less sophisticated users could be misled.

After looking at the FCRA’s definition of “creditor” which includes “any person” who engages in the activities described, the Third Circuit found it “unreasonable to assume that Congress, in requiring ‘maximum possible accuracy’ and allowing individuals and entities other than sophisticated creditors to use credit reports to make decisions, drafted the FCRA with the intention that only sophisticated creditors should understand the information that these reports contain.”

Despite finding that the “reasonable creditor” standard did not exclude unsophisticated individuals and entities, the Third Circuit nevertheless concluded that the term “reasonable creditor” did not accurately reflect the FCRA’s intent because the FCRA does not limit the permissible use of consumer reports to creditors and contemplates a range of permissible users. To account for these possibilities, the Third Circuit adopted a “reasonable reader” standard. It characterized the “reasonable reader” standard as “running the gamut to include sophisticated entities like banks and less sophisticated individuals such as local landlords.”

According to the Third Circuit:
A court applying the reasonable reader standard to determine the accuracy of an entry in a report must make such a determination by reading the entry not in isolation, but rather by reading the report in its entirety. On the other hand, if an entry is inaccurate or ambiguous when read both in isolation and in the entirety of the report, that entry is not accurate under Sec. 1681e(b).

Applying the “reasonable reader” standard to Trans Union’s credit reports, the Third Circuit concluded that the reports were not inaccurate or misleading. Trans Union argued that when read in the entirety of the reports, the pay statuses were clearly historical notations.

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