By John Albanese | May 25, 2021
In May 2020, the student loan servicer Great Lakes Educational Loan Servicing Inc. provided inaccurate information to the credit bureaus for millions of borrowers, incorrectly indicating that they had chosen to stop paying on their loans (an arrangement known as a “deferment”), rather than indicating these borrowers were current. As many as five million consumers immediately saw an alarming and unexplained drop in their credit scores in the middle of the pandemic, when millions could least-afford the consequences of an error.
Great Lakes is far from alone in misreporting credit information. Despite the passage of the Fair Credit Reporting Act (FCRA) in 1970, credit reporting errors have been a significant and persistent problem for over 50 years. It is well documented that the credit bureaus and furnishers—the companies that provide consumer credit information to the credit bureaus—engage in largely automated processes that are designed more to put up a façade of compliance with the FCRA rather than ensure accuracy in reporting. This report examines the continued problems within the credit reporting system with a focus on widespread inaccuracies by companies that furnish credit information, including student loan servicers.
Furnishers were largely unregulated by the FCRA until Congress amended the law in 1996. The 1996 amendments, however, only regulated furnishers in a limited manner. Notably, furnishers get a free pass for misreporting. As long as a furnisher fixes the negative reporting within 30 days of receiving a dispute, the furnisher cannot be sued by the consumer for the misreporting, no matter how reckless the misreporting was or the extent of the harm caused by the error. Further, due to the structure of the FCRA, it is generally difficult, if not prohibitive, for groups of borrowers to join together to bring a class action when all have been harmed by the same bad act. There are also court decisions that have found that borrowers can’t get injunctive relief—that is, a court order to get credit bureaus and furnishers to stop doing a harmful thing—as a remedy for consumers bringing FCRA lawsuits.
Congress has also hampered the ability of state legislatures to regulate furnishers by explicitly preempting state laws that regulate furnishers, except for grandfathering in two laws from Massachusetts and California. Although this broad preemption was supposed to sunset in 2003, Congress stripped the sunset from the FCRA. This hampered efforts by state lawmakers to rein in a wide range of harmful credit reporting practices, from the reporting of criminal convictions in Texas to medical debt collection in Maine. This also made permanent the current, dysfunctional status quo where private enforcement rights are denied to consumers in 48 states but preserved for consumers in California and Massachusetts. Even when furnishing errors are national in scope and affect borrowers in states across the country, Congress has blocked some—but not all—consumers from holding furnishers accountable. Despite increased attention on credit furnishers from the CFPB, including the CFPB’s so-called “Furnisher Rule,” credit furnishing errors are still prevalent, harmful, and largely unremedied.
While Congress should restore FCRA’s original vision, preserving states’ right to regulate furnishing, this report recommends steps that can be taken without a new Act of Congress to increase accountability for furnishers and protect borrowers from inaccurate credit reporting. These recommendations include:
- The CFPB should require through regulation that when furnishers are made aware of a credit reporting error, the furnisher must conduct a root cause of analysis to ensure that the issue is not systematic.
- The CFPB or FTC should explain through rulemaking, guidance, or amicus practice that injunctive relief is available for private litigants under the FCRA.
- The CFPB or FTC should clarify through rulemaking or guidance that a consumer may submit a dispute regarding a credit reporting error not only on their behalf, but for systemic issues, on behalf of all similarly situated consumers.
- The Department of Education should vest borrowers with private enforcement rights via its contracts with student loan servicers.
Because the law gives them a free pass before they face legal consequences, furnishers lack sufficient incentives to ensure that they report correctly in the first instance and fix misreporting promptly upon dispute. Regulators should focus not only on bringing enforcement actions against furnishers, but should also work to ease the path for consumers to hold furnishers to account.
Millions of student loan borrowers faced damaged credit in the early days of the pandemic—a failure that carried no long-term consequences for the companies responsible. Congress and regulators have an opportunity to stand up for these consumers and ensure industry no longer gets a free pass.
John Albanese is an Associate at Berger Montague. Mr. Albanese concentrates his practice on consumer protection with a focus on Fair Credit Reporting Act violations related to criminal background checks. Mr. Albanese has also prosecuted class actions related to illegal online lending, unfair debt collection, privacy breaches, and other consumer law issues.