Foreclosure and the Fair Credit Reporting Act

Mortgage lenders often have a difficult time adhering to the requirements of the federal law called the Fair Credit Reporting Act, which may create liability for them when attempting to bring a foreclosure lawsuit or pursue a nonjudicial foreclosure. The Fair Credit Reporting Act (FCRA) creates requirements that lending institutions must adhere to when reporting consumer information to the credit bureaus.

Inaccurate reporting of information may cause damages to borrowers and create liability on the part of mortgage lenders for a large numbers of mistakes. The FCRA governs the reporting of all information to credit agencies, regardless of whether it be accurate or not. Whether or not the borrowers have defaulted on payments is irrelevant to application of the FCRA on information reported.

There are a number of specific regulations that mortgage lenders and all creditors must comply with when providing credit to a possible borrower and in the ongoing operation and servicing of the loan. Lenders often have a very difficult time following all of these regulations while also attempting to comply with all of the other federal and state lending laws and will often misreport information about consumers’ accounts to the credit rating agencies.

If a lender denies credit or even a loan modification on the basis of information received from a credit agency, the consumers must be provided with a statement indicating that they can obtain a copy of their credit report from the reporting agency at no charge. The request must be sent to the company which provided the credit information within 60 days of the denial of credit by the lender.

Also, the creditor (or servicing company ) may not report information to credit agencies that it knows or has reason to believe is false or inaccurate. With the poor quality control most banks seem to have in place in their collections and foreclosure departments, mistakes are made more often than many homeowners might believe. In case any errors are discovered, the creditor is also required to correct the mistake on the borrowers’ report.

There is a specific notice requirement for mortgage creditors when providing credit to borrowers. It is titled a “Notice to the Home Loan Applicant” and includes information for the borrowers’ use. This notice provides information regarding disclosure of credit scores, an explanation of the credit scoring system, and instructions to contact the lender if the borrowers have questions about the terms of the loan.

The credit bureaus themselves also have to follow guidelines in the Fair Credit Reporting Act, including verifying any information that a consumer disputes as inaccurate. The verification must be done within thirty days of receipt of the dispute. If a record can not be verified, it must be removed from the credit report.

Willful violations of the Fair Credit Reporting Act allow homeowners to recover damages in three ways. The first is actual damages between $100 and $1,000 for each violation of the law. The second is any punitive damages that the courts may award to the foreclosure victims. And third, homeowners are entitled to attorneys fees and the costs of any legal action they bring against the lender for violations under the FCRA.

In practical terms, violations of the FCRA may be used by homeowners to offset liability in a foreclosure action or lawsuit. When homeowners are drafting their answer to the foreclosure complaint, they may wish to add violations of the FCRA as counterclaims to sue the mortgage company for damages. Depending on the amount and type of violations, along with any legal representation the homeowners utilize, such violations can create significant liability for the mortgage company.

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