In a recent precedential opinion, the Third Circuit has held that the Higher Education Act provides no safe haven from strict adherence to the Fair Credit Reporting Act for colleges and universities. Moreover, the Court reaffirmed that failure to adequately respond to student loan borrowers’ disputes regarding debt reporting may support the imposition of punitive damages against institutions of higher education.
Under the Fair Credit Reporting Act (“FCRA”), virtually all institutions of higher education are required to furnish credit reporting agencies (“CRAs”) with various information about student-loan borrowers’ indebtedness. In a precedential opinion interpreting the interplay between the FCRA, the Higher Education Act of 1965, as amended (“HEA”), and the resulting reporting and investigatory obligations of institutions of higher education, the Third Circuit recently held that colleges and universities may not deviate from the strict terms of the FCRA when reporting student loan indebtedness to CRAs, even in an attempt to facilitate the CRAs’ compliance with HEA. Of further note is the Third Circuit’s holding that, under certain circumstances, colleges and universities may be subject to punitive damages for failing to undertake the proper steps to correct, or flag as disputed, debts previously reported to CRAs once disputed by student borrowers.
The FCRA protects consumers from the transmission of inaccurate information about indebtedness and credit, and requires credit reporting practices that promote the transmittal of accurate, relevant, and current information in a confidential and responsible manner. In particular, to protect consumers from having their credit history marred indefinitely by old debts, the FCRA prohibits CRAs from reporting debt that has been “placed for collection” more than seven years prior to the report. The FCRA provides it is the CRA’s obligation to determine whether old debt must be removed, or “aged off,” a consumer’s report by gathering data, including the “delinquency date” of the debt. On the other hand, the HEA explicitly excepts certain unpaid federally-backed education loans from FCRA’s age-off requirement and permits unpaid, federally-backed education loans to stay on borrowers’ reports after the seven-year period has run.
In Seamans v. Temple University, decided February 21, 2014, the Third Circuit addressed, among other things, whether, in reliance on the HEA’s exception to the age-off provisions, colleges and universities can unilaterally choosenot to furnish CRA’s with the first “delinquency date” of reported debt to prevent the debt from being aged-off. The Court rejected the argument that because student loan debt does not age off in the same way as other debt, institutions of higher education are not required to provide the full range of FCRA data, including the delinquency date.
Notably, the Third Circuit went on to hold that institutions have a duty under the FCRA to investigate any dispute raised by the student borrower and inform the CRAs of that dispute. A failure to do so, according to Seamans, exposes colleges and universities to a trial on whether that failure to comply with the FCRA was willful, which finding could in turn support the imposition of punitive damages against institutions.
The clear take home from Seamans is that when your institution, or its agent, including a third-party servicer of the debt, reports student loan debt, it should do so in a manner that is strictly consistent with the terms of the FCRA. Moreover, given the dramatic recent increase in student loan debt default rates, institutions should carefully examine their policies and procedures governing not just the reporting of student debt, but the reasonableness of investigations for disputed reports and subsequent action when such disputes are lodged by borrowers. If you have any questions about how to structure or implement such policies, or about the FCRA, the authors would be pleased to assist.