For many community banks, the legal side of banking can be overwhelming and difficult to navigate. At ICBB, we hope to be a resource for community banks in all aspects of their operations. We’ve asked our friends at Dinsmore & Shohl LLP to provide information on legal subjects within banking. This article is a follow-up to the April 17 article, When the Borrower Doesn’t Pay: Untangling the Web of Credit Reporting by Cassie Carter.
In our last installment on credit reporting, we discussed what The Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681x (the “FCRA”) generally requires of banks. In this second installment, let’s talk about what to do when you receive a dispute.
Direct vs. Indirect Disputes
The FCRA requires banks to investigate disputed information in a consumer report within 30 days of receipt of the dispute. There are two kinds of disputes: direct and indirect.
As the name indicates, direct disputes occur when a borrower disputes the information on their credit report directly to the bank. This usually comes in the form of a letter. The bank is required to conduct a reasonable investigation and provide a written response within 30 days. If the information on the credit report is inaccurate, it is best practice to submit a change to the credit reporting agency and respond to the customer outlining what changes have been made. If the information is accurate, banks simply report no change due to the accuracy of the information.
An indirect dispute occurs when the consumer submits a dispute to the credit reporting agencies. The credit reporting agencies must convey that information to the bank within 5 days. If the bank receives an indirect dispute, it must conduct a reasonable investigation within 30 days. If the information is inaccurate, you can either modify the information or delete the information. A letter may also be issued to the customer explaining the changes made. If the information is accurate, you can breathe a sigh of relief and simply report no change due to the accuracy of the reporting.
Reducing Risk and Minimizing Liability
In both instances, liability may attach if:
1) the inaccurate information is materially misleading, and
2) the bank fails to conduct a reasonable investigation.
A “reasonable investigation” is a searching inquiry into the consumer’s dispute. This may include review of your system of record, review of the consumer’s file, review of any loan documents at issue, and review of any public filings concerning the consumer. While this may seem like significant work, creating a procedure to ensure reasonable investigations is critical to reducing risk and minimizing liability. Additionally, good investigation practices will assist the bank in providing exceptional service and accurate reporting.
For more information, training, and litigation support, please feel free to reach out to Cassie Carter or Sarah Mattingly at Dinsmore & Shohl LLP. Sarah and Cassie are providing free training services this fall to any interested member banks. If you are interested in scheduling a training, please contact them.