Foreclosure and Deficiency Reporting on Credit Reports

A mortgage servicer called a “furnisher” for purposes of credit reporting is responsible for updates to a borrower’s credit report.  Many times following a foreclosure, there is a limited time for the lender to seek a deficiency judgment.  Here is Florida it is one year.  If a year goes by, and the lender fails to seek a deficiency judgment then it waives the amount it is still owed after the foreclosure sale of a home.

Here’s the good news:  If a lender fails to report a deficiency as having been eliminated, discharged or abolished, it is then reporting inaccurate information.  This inaccurate reporting opens the door to the furnisher’s liability under the federal Fair Credit Reporting Act, 15 U.S.C. Section 1681 et seq., (the “FCRA”) per the Ninth Circuit (California) in a recent case.  Gross v. CitiMortgage, Inc., 20-17160 (9th Cir. May 16, 2022).

This case is being compared to a leading contempt case, where the Supreme Court in Midland Funding  LLC v. Johnson, 137 S.Ct. 1407, (2017) found that a debt collector who filed a proof of claim in a bankruptcy that was obviously barred by the statute of limitations did NOT engage in false, deceptive, misleading, unconscionable, or unfair conduct so there was no violation of the Fair Debt Collection Practices Act.  While this decision involved a different set of circumstances and a different law, it is clear that these two views could be considered as inconsistent.

Will the recent 9th Circuit decision start to move the needle back to the consumer’s point of view?  Or is it simply that the FCRA is governed by a different set of rules than a contempt case filed in bankruptcy.

The test for an FCRA is that a consumer must first make a prima facie case demonstrating that the credit report was inaccurate.  Then, the consumer must show that the furnisher did not follow “reasonable procedures” to ensure “maximum possible accuracy” of its reporting.  It only makes sense that if the debt is no longer owed, that it should not be reported on one’s credit.

So this is very good news for FCRA cases involving credit reporting.  Consumers should know that if they have to give up a house, it won’t be the end of their good credit scores!