Credit Report Inquiry Could Be a Third Party Communication That Violates the FDCPA, Says N.D. Ohio

The Northern District of Ohio (N.D. Ohio) issued a decision earlier in March that could have significant impact on debt collectors and debt buyers if adopted in other jurisdictions. In Holloway v. JTM Capital Management, LLC, No. 1:18-cv-1794 (N.D. Ohio Mar. 5, 2019), the court denied JTM Capital Management LLC’s (JTM) motion to dismiss and found that reviewing a consumer’s credit report is a third party communication under the Fair Debt Collection Practices Act (FDCPA) and found that passive debt buyers are considered “debt collectors” under the statute.

Editor’s Note: A decision on a motion to dismiss is not necessarily a decision on the merits of the case. When reviewing a motion to dismiss, the court generally looks to see if the plaintiff sufficiently stated a claim in his or her complaint (e.g., provided some factual basis for each element of the claim). The court looks only to the pleadings and does not review any evidence outside of the complaint and answer. In denying a motion to dismiss, the court is saying that the plaintiff stated enough facts in his complaint to make a plausible claim and that the case should continue to get more evidence to make a decision on the merits.

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Definition of Debt Collector

The court first turned to whether or not JTM falls under the definition of “debt collector.” JTM argues that it is a passive debt buyer—one that places debts directly with third-party collection agencies rather than communicating with consumers itself—and is therefore not subject to the FDCPA. The court disagreed.

In Henson v. Santander Consumer USA Inc., the Supreme Court of the United States (SCOTUS) stated that the FDCPA’s definition of “debt collector” lists two categories of businesses: (1) those whose principal purpose is the collection of any debts and (2) those who regularly collect or attempt to collect debts owed to another. In Santander, SCOTUS found that active debt buyers—those who themselves communicate with consumers and collect the debts they purchased—fall outside of the scope of the second category and are therefore not subject to the FDCPA. However, SCOTUS acknowledged that its decision does not analyze the first category.

N.D. Ohio acknowledged that JTM does not fall within the second definition category; however, the court found that for the purposes of a motion to dismiss, enough factual basis was presented in the complaint to find passive debt buyers like JTM might fall within the first without much explanation. The court denied the motion for this issue.

Credit Report Review as a Third-Party Communication

The court then turned to JTM’s credit report inquiry to see whether or not it falls within the purview of the FDCPA. JTM argues that the inquiry falls outside of the FDCPA's scope because it was not an attempt to collect a debt. Plaintiff argues that the inquiry falls under a third-party communication because it was transmitted to TransUnion (a third party) and it was for the purpose of collecting a debt (the inquiry was categorized as “collections”).

The court noted that there is a fine line between whether or not a third party communication violates the FDCPA. If the communication does not reveal the debt and does not have potential to convey embarrassing or harmful information to the third party, then it falls outside of the FDCPA's purpose and would not be a violation. However, if the communication reveals the existence of or provides detail about the debt, then it could be harmful to the consumer, as found by the Sixth Circuit in Brown v. Van Ru Credit Corp.

The court states:

While the JTM communication with TransUnion sought information from TransUnion rather than supplying information to TransUnion about Holloway’s debt, it did convey one piece of information—i.e. that it sought information for purposes of collection. It also raises the question whether JTM could have gained access to Holloway’s credit report if it did not allege it was for collection since the Complaint alleges the debt was discharged.

The court eventually separated the issue of third party communication and whether or not the debt was actually owed. Looking strictly at the communication with TransUnion as a third party communication, the court found that there were sufficient allegations in the complaint to deny the motion to dismiss.

insideARM Perspective

There is a lot to unpack in this one decision.

The trend in recent court rulings about whether debt buyers are “debt collectors” subject to the FDCPA could have an impact on how debt buyers conduct business. If active debt buyers—those who themselves collect on the debt they purchase— are not subject to the FDCPA (per SCOTUS in Santander) but passive debt buyers are, will debt buyers reconsider placing accounts with third-party collection agencies in order to avoid FDCPA liability? Or will the time and money saved by placing accounts with third-party agencies still favor a business decision to be a passive debt buyer? Will this impact how consumer finance regulators oversee debt buyers?

N.D. Ohio’s decision regarding the credit report inquiry is an even stranger one as it collides with the Fair Credit Reporting Act (FCRA). The FCRA specifically lists the “review or collection of a consumer’s account” as a permissible purpose to obtain a consumer credit report. In order to ensure that requests to view credit reports fall under a permissible purpose, credit reporting bureaus often require that a category of permissible purpose be selected when the inquiry is made. Therefore, in order to view a consumer’s credit report, those looking to collect a debt must state that their inquiry’s purpose is for collections. However, following N.D. Ohio’s logic, each of these inquiries—because they are to a third party and reveal that the consumer has a debt in collections—would be subject to FDCPA liability. Would the court extend this logic to data furnishing, leaving creditors and debt collectors who credit report accounts in collections open to FDCPA liability as well? This is one of those decisions that, if it snowballs down the mountain, has the potential to limit access to credit for consumers. Hopefully this is a one-off decision and, when the case is reviewed on the merits, the court rules that this type of communication is not a violation.

This also raises a question of the consumer's consent. If the consumer provided consent in the underlying credit agreement to pull his or her credit report and to have data about the account furnished to the credit reporting bureaus, it should count as consent to this specific type of alleged third-party disclosure.