This is the third part of our paper we handed out at a seminar we recently gave at the University of Alabama Law School to collection and consumer lawyers. We hope this is helpful to you as debt collectors very often pull credit reports. Sometimes that is allowable but other times it is illegal so you should always check your credit reports to see if debt collectors are pulling your reports. If they are, demand that they tell you the basis for doing so.
III. PULLING CREDIT REPORTS – HELPFUL OR HARMFUL?
What are the reasons a debt collector would want to pull credit reports? There are several legitimate reasons and several illegitimate ones. There is also recent case law that warns debt collectors to be careful when deciding whether to pull credit reports.
A. Why Pull Credit Reports?
Debt collectors pull reports to help in collection activities. This is the ultimate reason to pull a credit report of a consumer/debtor. Pulling a report can help a debt collector find a debtor. It can also give guidance to a debt collector as to whether it is worthwhile to try to collect from a consumer. A credit report is similar to a report card – it shows how the consumer is doing financially. Is the consumer paying her bills on time? Maxed out on credit cards? Applying for more credit – perhaps a mortgage? Finally it lets the consumer know that the debt collector is coming after her and may prompt her to contact the debt collector.
Debt collectors, however, have been known to pull reports in order to intimidate or hurt consumers. For example, some debt collectors have told consumers they will pull the consumer’s report every day to trash their credit score. Each debt collector pull is a “hard inquiry” and does damage the credit score. It is unclear if the scoring models used by FICO and the CRAs would still allow multiple pulls by a single debt collector to destroy a consumer’s credit score. But the threat is still valid enough to intimidate consumers who want to protect their credit score.
B. When Can A Debt Collector Pull A Credit Report?
It used to be assumed that as long as the debt collector was pulling the report for collection purposes, then it was permissible. Now it is not so clear.
The significance of this is pulling a credit report without permission exposes the debt collector to an FCRA lawsuit. Statutory damages can be awarded as well as attorney fees and punitive damages. Pulling credit reports without permission is a perfect example of an invasion of privacy which could quite naturally lead to a large compensatory damage award for emotional distress.
C. Pintos Decision Is A Warning To Debt Collectors
The recent case of Pintos v. Pacific Creditors Assoc., 504 F. 3d 792 (9th Cir. 2007), has created some concern among debt collectors as to when it is proper to pull credit reports to assist in collecting debts.
Pintos sued Pacific Creditors Association (“Pacific) for violations of the FCRA alleging Pacific obtained her credit report “without any FCRA-sanctioned purpose.” 504 F.3d at 796.
The district court granted defendant’s summary judgment motion citing to the Ninth Circuit’s previous decision under Hasbun v. County of Los Angeles, 323 f. 3d 801 (9th Cir. 2003), which had held that debt collection was a permissible purpose for obtaining a credit report. 504 F.3d at 796.
The issue was whether the FCRA and FACTA (recent amendments to the FCRA) permit a debt collector to pull a credit report for the purposes of collecting any debt or does the debt have to arise out of a voluntary “credit transaction”?
The facts are fairly simple - Pintos’ car was found by police officers with an invalid registration and was therefore towed by P&S towing. P&S later obtained a lien for the cost of towing and storage. Pintos failed to claim the vehicle and it was sold by P&S. The sales price of the vehicle was not enough to cover the lien, so P&S asserted a claim against Pintos for the difference. P&S transferred the claim to the debt collector Pacific to collect the deficiency. 504 F.3d at 796-797.
On December 5, 2002, Pacific pulled a copy of Pintos’ credit report through Experian. It asserted that this was done in connection with its efforts to collect on Pintos’ debt to P&S. 504 F.3d at 797.
The Court began its analysis by noting that “Congress enacted the FCRA in 1970 to promote efficiency in the Nation’s banking system and to protect consumer privacy.” 504 F.3d at 798 [citation omitted]. It has frequently noted that those two goals are in tension and the FCRA attempts to balance the two competing interests. 504 F.3d at 798.
Section 1681b(a) authorizes the furnishing of credit reports for a limited number of purposes. Section 1681b(a)(3)(A) limits the furnishing of reports “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.” [Emphasis added]. The Court noted that this section does not provide that all “account collection” is a permissible purpose for obtaining credit reports. Instead, this section is limited to collections on an account “in connection with a credit transaction involving the consumer.” 15 U.S.C. Section 1681b(a)(3)(A). 504 F.3d at 798.
In order to determine whether Pacific had a permissible purpose, the Court undertook a detailed analysis of the terms used in § 1681b(a)(3)(A). The Court focused first on the definition of the term “credit transaction,” noting that the original Act did not define the term “credit.” Congress, however, amended the FCRA in the FACTA defining credit as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefore.” 504 F. 3d at 798.
The Court held that a “credit transaction” requires “voluntary consumer participation,” noting “[a] consumer who chooses to initiate a credit transaction implicitly consents to the release of his or her credit report for related purposes.” 504 F.3d at 799. Thus, the act “forges a direct link” between the consumer’s search for credit and the furnishing of the report. This requirement offers the consumer that degree of privacy protection sought by the Act. The two critical elements are “voluntary” and “direct participation.” 504 F.3d at 799.
In this case, Pintos did not voluntarily seek credit. Obviously, Pintos did not intend for her vehicle to be towed and stored and thus incur the resulting debt to P&S. Thus, the Court held the debt arose involuntarily. Additionally, she did not seek and no one offered her “credit.” Therefore, since Pintos’ credit report was not pulled in the underlying debt as a result of a voluntary credit transaction, Pacific did not have a permissible purpose in pulling the credit report to collect. Pacific did not have any more right to pull the credit report than did the underlying creditor P&S. Though the Court did not articulate this, it implicitly found that P&S would not have had the right to pull the credit report.
The district court’s granting of summary judgment was based on a pre-FACTA case. FACTA specifically defined “credit transaction” where the FCRA had not. Interestingly, the Court specifically noted that it was not addressing whether Hasbun, a case in which the government pulled a credit report to assist in collecting on a child support judgment, would have been decided differently today in this post FACTA world.
Thus, the Court reversed the summary judgment because Pacific did not pull Pintos’ credit report related a “proper” credit transaction.
D. Bottom Line For Debt Collectors
Debt collectors must make sure the underlying transaction was a voluntary credit transaction in which the consumer directly participated. There does not seem to be much case law on this issue but several types of debt come to mind that probably are not credit transactions. Emergency room visits – the patient may have been unconscious. But would the doctrine of implied consent apply? Fines or penalties? Child support? Debt collectors must think carefully on these matters as a mistake (particularly an “across the board” mistake on thousands of consumers) could be devastating financially for the debt collector. Consumers must examine every time a debt collector pulls their reports to see why it was pulled and whether the debt collector had a legitimate basis to do so. If not, then a suit against the debt collector may be in order.
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