Investigating Direct Disputes

QUESTION

A recent audit of our servicing platform showed that we failed to investigate direct disputes in our reporting to the credit agencies. There seemed to be a gap in how we identified what dispute needed to be investigated and what dispute did not. 

We reviewed thousands of files and found that some of the disputes were definitely miscategorized. Because of the miscategorizing of them, we did not conduct investigations. That led to consumer complaints. Our regulator also contacted us about the consumer complaints. It is coming here in a few weeks to examine our process. 

We found out that our loan servicing software had incorrect rules for identifying the proper categorizing of the disputes. Now, we are putting in new rules and overriding the old rules. This was a preventable calamity. We want your guidance to know when we must conduct an investigation. 

When must we investigate a direct dispute over the information in a credit report? 

What are the exceptions to the requirements to conduct the investigation? 

ANSWER 

To begin, let's be clear about what is a "direct dispute." This is a statutorily defined term.[i] In essence, it is a dispute by a consumer directly to a furnisher – including a furnisher that is a debt collector – concerning the accuracy of any information in a consumer report and pertaining to an account or other relationship that the furnisher has or had with the consumer. 

By the word "accuracy," I mean reported information[ii] about an account or other relationship with the consumer that reflects the terms of and liability for the account (or other relationship), reflects the consumer's performance and other conduct with respect to the account (or other relationship), and identifies the appropriate consumer. 

So, when should you conduct an investigation in connection with a direct dispute involving a consumer report? What is required is a reasonable investigation. There are four primary direct disputes that require a reasonable investigation. Let's consider each of them.

 Required Investigation of a Direct Dispute

 1. The consumer's liability for a credit account or other debt with the furnisher, such as direct disputes relating to whether (a) there is or has been identity theft or fraud against the consumer, (b) whether there is individual or joint liability on an account, or (c) whether the consumer is an authorized user of a credit account;

 2. The terms of a credit account or other debt with the furnisher, such as direct disputes relating to the type of account, principal balance, scheduled payment amount on an account, or the amount of the credit limit on an open-end account;

3. The consumer's performance or other conduct concerning an account or other relationship with the furnisher, such as direct disputes relating to the current payment status, high balance, the date a payment was made, the amount of a payment made, or the date an account was opened or closed; or

 4. Any other information included in a consumer report regarding an account or other relationship with the furnisher that bears on the consumer's creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.[iii] 

Exceptions to Requiring an Investigation of a Direct Dispute 

Concerning the exceptions to the requirements to conduct the investigation, there are two primary exceptions. Specifically, the following direct disputes do not apply to a furnisher if:

(1) The direct dispute relates to:

 a) The consumer's identifying information (other than a direct dispute relating to a consumer's liability for a credit account or other debt with the furnisher, such as name(s), date of birth, Social Security number, telephone number(s), or address(es);

 b) The identity of past or present employers;

 c) Inquiries or requests for a consumer report;

 d) Information derived from public records, such as judgments, bankruptcies, liens, and other legal matters (unless provided by a furnisher with an account or other relationship with the consumer);

 e) Information related to fraud alerts or active duty alerts; or

 f) Information provided to a consumer reporting agency by another furnisher; or

 (2) The furnisher has a reasonable belief that the direct dispute is submitted by, is prepared on behalf of the consumer by, or is submitted on a form supplied to the consumer by a credit repair organization[iv] or an entity that would be a credit repair organization, but for any nonprofit organization which is exempt from taxation under as a 501(c)(3).[v]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 16 CFR § 660.2(b)

[ii] 16 CFR § 660.2(a)

[iii] 16 CFR § 660.4(a)

[iv] As defined in 15 USC § 1679a(3)

[v] 15 USC § 1679a(3)(B)(i). See also, § 501(c)(3) in 26 USC § 501 - Exemption from tax on corporations, certain trusts, etc.