July 17, 1998
Jonathan D. Jaffe
Hinchy, Witte, Wood, Anderson & Hodges
525 B Street - Suite 1500
San Diego, CA 92101-4401
Re: Section 623(a)(1)(A)of the Fair Credit Reporting Act
Dear Mr. Jaffe:
Thank you for your recent letter in which you ask for a staff opinion as to whether the practices of your client, a residential mortgage lender, are in compliance with the Fair Credit Reporting Act ("FCRA").
As you point out in your letter, prior to the amendments that went into effect on September 30 of last year, entities such as your client that reported information to consumer reporting agencies did not have legal obligations under the FCRA. However, the amended FCRA now imposes obligations upon such information furnishers. These duties are found in Section 623 and include a general duty to report accurately, as well as a number of specific duties relating to updating information, reporting closed accounts, and providing notice of delinquencies. You ask for our guidance as to the obligations of your client under Section 623.
You note that, under some circumstances, title to a particular property is transferred to a third person ("new owner") without your client's consent. As an example, this situation can occur on the death of the original borrower when title to the property is transferred to a relative pursuant to a will or a trust document. In other instances, the terms of the promissory note(1) and security instrument (a trust deed or mortgage) may permit the new owner to take title without your client's consent. Under such circumstances, your client will not require the new owner to formally assume the original borrower's loan obligation by executing an agreement to assume the original borrower's obligations under the note. Rather, the new owner takes title to the property "subject to" your client's existing security instrument but without becoming personally obligated on the note.
Some of the new owners fail to maintain payments due under the note. It has been your client's standard practice in the past to report to consumer reporting agencies borrower delinquencies and defaults on loans held or serviced by your client. Historically, the practice has been to report new owners who fail to maintain payments due on the note after they take title to the property, regardless of whether or not they have formally assumed the original borrower's obligations under the note. In light of your client's new duties under the FCRA, you ask whether your client may continue to report payment delinquencies, defaults and foreclosures under the "new owner's" name.
We believe that the answer to your question depends upon the "new owner's" obligations under state law and, if appropriate, the terms of the specific note and security instrument. If state law treats non-consensual transfers of property as creating duties on the part of the individuals or parties who inherit or otherwise obtain control of the property that are largely identical to the duties that the original mortgagees had -- including the duty to make monthly payments for as long as the mortgage is in effect -- then we believe that your client may treat the new owner in the same fashion as the original borrower would have been treated. In these circumstances, your client may report delinquencies, defaults and foreclosures when they occur. On the other hand, if under state law the "new owner" has only limited liabilities, your client may report delinquencies or other occurrences only to the extent that the new owner is actually liable under state law.
The opinions set forth in this informal staff letter are not binding on the Commission.
Cynthia S. Lamb
1. You state that each loan made by your client is evidenced by a promissory note secured by a trust deed or mortgage encumbering the residential real property. When a loan is made, the original borrower executes and becomes personally obligated under both the promissory note and the trust deed or mortgage.