Last week, the 11th Circuit issued an opinion reversing and remanding a prior decision from the United States District Court for the Southern District of Georgia related to the proper verification of debts when a consumer disputes their validity.

In Hinkle v. Midland Credit Management, Inc., et al., Hinkle appealed the grant of summary judgment in favor of Midland Credit Management, Inc., Midland Funding, LLC, and Encore Capital Group, Inc. (Midland). Hinkle asserted claims under the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA). The claims center around Hinkle’s assertion that Midland attributed debts to Hinkle in error and then reported those debts to various credit reporting agencies. After Hinkle disputed their validity, she claims Midland failed to properly verify those debts pursuant to FCRA and FDCPA. The District Court granted summary judgment for Midland holding that a reasonable jury would find that Midland did not violate FCRA or FDCPA with respect to Hinkle. The 11th Circuit has now reversed and remanded only as to Hinkle’s claims under § 1681 s-2(b) of FCRA; all remaining claims were affirmed.

Midland purchased two charged-off debts (“junk debts”) from other debt collectors and received electronic files that provided the amount of the debt, the original creditor’s name, the charge-off date and personal information about the account holder. While Midland did not receive any account-level documentation, both the debt sellers had an obligation to help Midland obtain that documentation if requested in order to respond to consumer inquiries. Midland sent separate letters to Hinkle for each of the debts offering to settle for less than the full amount. The first settlement offer was paid in full, therefore Midland marked the account paid in full and stopped reporting it to the reporting agencies. It should be noted that Hinkle claims she never received the letter and did not make that payment. In fact, she claims she knew nothing about the account or the settlement until she received a copy of her credit report a few years later. At that point she disputed the debt with the reporting agencies who then notified Midland of the dispute and instructed it to investigate.

A few months after the first dispute was made, Midland sent a collection letter for the second debt to Hinkle which she did receive. However, she told Midland by phone that she did not open that account and did not owe the debt. Midland then asked Hinkle to provide documents to support the dispute but did nothing else at that point.

Hinkle eventually disputed the second debt with the reporting agencies who again referred it to Midland to investigate. As part of its investigation, Midland only reviewed the electronic files it had purchased and asked Hinkle to supply more information. Midland never asked the sellers of the junk debt to assist in acquiring any account-level documentation.

FCRA requires reporting agencies and companies that furnish information to those agencies to “conduct a reasonable reinvestigation to determine whether the disputed information is accurate” (15 USC § 1681 i(a)(1A). According to the appellate court, the investigation that Midland performed was not considered reasonable. Hinkle argued that because Midland failed to obtain any account-level documentation in response to her dispute over the debts, Midland’s conduct was insufficient to satisfy § 1681 s-2(b).

The scope of the duty to investigate under § 1681 s-2(b) was an issue of first impression for the 11th Circuit. The court held that what constituted a “reasonable” investigation would vary depending on the circumstances of each case and whether the reporting agency or the information furnisher conducts the investigation. Further, the reasonableness of the reinvestigation also would depend on who the information furnisher is – an original creditor, a collection agency, a debt buyer, or a “down the line buyer” such as Midland, and on the quality of the documentation available to that furnisher.

Under FCRA there are three potential ending points to reinvestigation: verification of accuracy, a determination of inaccuracy or incompleteness, or a determination that the information “cannot be verified.” While FCRA does not define “verify” or “investigation,” using the ordinary meaning of those terms, the court found that FCRA does require some degree of careful inquiry by furnishers of information. Specifically, when a furnisher does not already possess evidence establishing that an item of dispute is true, this section requires them to seek out and obtain that evidence before reporting the information as “verified.”

The court stated that an information furnisher has certain options in this situation:

  1. Verify the information it reported either through documentary evidence or by relying on personal knowledge sufficient to establish the truth of the information.
  2. If the necessary evidence is not available or too burdensome to acquire, it can report that the disputed information is unverifiable. (If it is determined that the evidence is unverifiable, the furnisher must notify the reporting agencies that the information cannot be verified, however, the furnisher can continue with collection.)
  3. The final way is to conduct an investigation and conclude that the disputed information is “inaccurate or incomplete.”

Midland argued that by sending a letter to Hinkle it shifted the burden to her to substantiate her dispute. The court rejected this argument noting that there is nothing in FCRA that permits a furnisher to shift its burden of “reasonable investigation” to the consumer in this type of dispute. Further, in a mistaken identity case it would make little sense as the furnisher would be in a better position than the debtor to confirm the actual owner of the account.

The court also rejected Midland’s second argument that its burden to investigate was not as extensive because the notice of the dispute it received from the reporting agency only stated that the accounts were not “his/hers.” However, since Midland had access to additional information beyond that provided by the reporting agencies, it would have been reasonable for Midland to review that information as part of its investigation. Finally, Midland asserted that there was no “willful” violation of § 1681 s-2(b). However, the court stated that a reasonable jury could find that Midland either knowingly or recklessly reported the debts as “verified” without obtaining enough information and documentation to support that conclusion.

This decision potentially imposes more stringent compliance with the Fair Credit Reporting Act on debt buyers when consumers dispute entries in their credit reports. Debt buyers would be wise to exhaust every effort to obtain documentary evidence throughout the investigation into any such disputes.