Sepulvado v. CSC Credit Services, Inc.

• Citation: 158 F.3d 890
• Decision Date: 23 October 1998
• Docket Number: No. 97-50423,97-50423
• Parties: Edward C. SEPULVADO; Sheree D. Sepulvado, Plaintiffs-Appellees-Cross-Appellants, v. CSC CREDIT SERVICES, INC.; et al., Defendants, CSC Credit Services, Inc., Defendant-Appellant-Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 890

158 F.3d 890

Edward C. SEPULVADO; Sheree D. Sepulvado, Plaintiffs-Appellees-Cross-Appellants, v. CSC CREDIT SERVICES, INC.; et al., Defendants, CSC Credit Services, Inc., Defendant-Appellant-Cross-Appellee.

No. 97-50423.

United States Court of Appeals,

Fifth Circuit.

Oct. 23, 1998.

David W. Rogers, William Randall Gathany, Law Office of Dave Rogers, San Antonio, TX, for Sheree and Edward Sepulvado.

Patrick O. Keel, Scott K. Field, Baker & Botts, Austin, TX, for CSC Credit Services, Inc.

Appeals from the United States District Court for the Western District of Texas.

Before KING, EMILIO M. GARZA and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

CSC Credit Services, Inc. (CSC) appeals from judgment entered in favor of plaintiffs Sheree and Edward Sepulvado, after a bench trial, in this matter brought pursuant to the Fair Credit Reporting Act, 15 U.S.C. §§ 1681--1681(t). We reverse, and render judgment in favor of the defendant, CSC.

BACKGROUND

The Sepulvados' claim that an erroneous credit item on a report prepared by CSC caused Texas Homestead Mortgage Company (Texas Homestead) to deny them a mortgage for the purchase of a new home. The material facts relating to the parties' conduct are essentially undisputed.

I. The Prior Foreclosure and the New Purchase

In 1984, Edward and Sheree Sepulvado purchased a home. In the summer of 1988, the Sepulvados were unable to make timely payments. In July 1988, the mortgage lender, the now-defunct University Savings, foreclosed on the home. University Savings sold the home for less than was owed by the Sepulvados, which created a deficiency on their account of $12,333. Sometime around June 1989, University Savings reported the foreclosure to certain credit reporting agencies, including the defendant CSC. University Savings did not report any deficiency at that time. ¹ In July 1989, University Savings notified the Sepulvados that they were responsible for the $12,333 deficiency and attempted collection by a form letter dated July 21, 1989. The Sepulvados never paid the deficiency, and University Savings did not reduce the obligation to judgment by commencing legal action.

Under the provisions of the Fair Credit Reporting Act, the Sepulvados foreclosure and the resulting deficiency could have been reported on their credit for a period of seven years. See 15 U.S.C. § 1681c(a). The Sepulvados knew this, and for more than six years lived in rental property while waiting for the foreclosure to drop off of their credit report. Then in March 1995, approximately six years and eight months after the foreclosure, the Sepulvados signed an earnest money contract to purchase a new home. The Sepulvados were referred by the builder to Texas Homestead to finance that purchase.

II. The Mortgage Application

The Sepulvados informed the Texas Homestead loan officer, Wendy Jamison, about the earlier University Savings foreclosure. The Sepulvados did not inform Ms. Jamison about the deficiency resulting from the foreclosure. Ms. Jamison told the Sepulvados not to include any information about the foreclosure on their application. ² That advice was apparently based upon the possibility that the foreclosure had already been removed from their credit report, or would be removed before the purchase of the new home was closed. Ms. Jamison also told the Sepulvados that Texas Homestead might approve the mortgage even if the aging foreclosure appeared on the credit report, provided that their credit report was otherwise as they had represented it in the application. Once again, there was no conversation concerning either the existence of the deficiency or the effect that a deficiency would have on their application. The Sepulvados did not include any information about the foreclosure in the Texas Homestead application, although that information was clearly called for by the language of the application.

III. The Negative Credit Report

On or about March 13, 1995, Texas Homestead obtained a credit report on the Sepulvados from Advanced Credit Technology (ACT). The report contained an entry that was ultimately determined to be related to the deficiency created by the 1988 University Savings foreclosure. On its face, however, the ACT entry indicated that Mr. Sepulvado owed $12,333 on an account with an "open date" of March 1994, and that no payments had ever been made.

ACT retrieved the information made the basis of that entry from a database maintained and provided by Equifax. Equifax is an affiliate of the defendant, CSC. ³ ACT made certain material changes to the CSC entry before sending its own report to Texas Homestead. For example, whereas the ACT entry reported an "open date" of March 1994, the CSC entry reported that an obligation in the amount of $12,333 had been "assigned" to "CSC/TCCP" in March 1994. ⁴ At trial, ACT President James Fuchs confirmed that the information ACT retrieved from credit repositories was often reformatted before the issuance of an ACT report.

When Texas Homestead received the ACT report, Ms. Jamison read the described entry to reflect that the Sepulvados had taken out a $12,333 loan in March 1994, and then immediately defaulted without making any payments. Ms. Jamison informed Mrs. Sepulvado that the mortgage would not be approved as long as the outstanding account remained on the credit report. Testimony from both Ms. Jamison and a mortgage banker produced by the defense established that mortgage lenders will not approve a mortgage when there is a collection item reported on the credit report. In making that decision, industry practice requires that the mortgage lender be guided primarily by information on the face of the credit report, rather than by any explanatory statements that might be provided by the applicant. Accordingly, Ms. Jamison further informed Mrs. Sepulvado that neither Texas Homestead nor Ms. Jamison herself could assist the Sepulvados with regard to removing the negative entry. Rather, Ms. Jamison encouraged the Sepulvados to contact the creditor and the credit reporting agency to determine whether the entry was being erroneously reported.

Near the same time, ACT also sent the Sepulvados a letter informing them that adverse credit history had been reported to Texas Homestead. The letter contained a version of the ACT entry which showed an outstanding collection item in the amount of $12,333. Although the letter reported that Texas Homestead had requested additional information about the item, the undisputed testimony at trial, from both the President of ACT and Ms. Jamison, was that Texas Homestead never instigated any request for information from ACT.

IV. The Sepulvados' Attempts to Clear their Credit Report

The Sepulvados began their investigation by calling the number listed for "CSC/TCCP" in the credit report. As suggested by the entry, TCCP is also affiliated with CSC. TCCP was formed in January 1994 as a partnership between CSC and the Resolution Trust Corporation (RTC) for the purpose of collecting mortgage foreclosure debts. The CSC entry at issue in this case was submitted by the RTC when the debt was assigned by the RTC to "CSC/TCCP" in March 1994. ⁵ Thus, defendant CSC was in the peculiar position of acting as both the creditor and the credit reporting agency with respect to the objectionable entry.

That duplicity was compounded by the fact that CSC apparently maintained little, if any, functional separation between the credit reporting division and the collection division. When Mrs. Sepulvado called the number provided in the entry for CSC/TCCP on March 14, she was transferred to CSC employee Mark Lewis. Mr. Lewis represented to the Sepulvados that he was in a position to change their credit reports. Mr. Lewis was also attempting to collect the debt. ⁶ After some investigation, Mr. Lewis told Mrs. Sepulvado that the entry related to the $12,333 deficiency resulting from the 1988 University Savings foreclosure. Mr. Lewis did not explain to Mrs. Sepulvado why CSC was entitled to collect on that debt.

The following day, March 15, 1995, Mrs. Sepulvado called Mr. Lewis and offered to settle the account for ten percent of the deficiency owed. Mr. Lewis rejected the offer, but countered that CSC would accept fifty percent of the deficiency. Mrs. Sepulvado rejected the counteroffer and the conversation was ended.

On March 16, 1995, Mr. Sepulvado contacted Mr. Lewis and explained that the entry on the credit report was inaccurate because it did not reflect that the obligation arose from a 1988 mortgage foreclosure. Mr. Lewis responded that CSC could report the item "in any manner [CSC] saw fit," that the entry could "be reactivated any time," and that CSC could report the item for the rest of the Sepulvados' lives if it saw fit. Mr. Lewis also informed Mr. Sepulvado that the entry would continue to impede their attempts to get a new mortgage. In spite of Mr. Sepulvado's request that the entry be amended to reflect that the obligation related to a 1988 mortgage foreclosure and resulting deficiency, Mr. Lewis did not supplement the entry to reflect those facts, did not inform Mr. Sepulvado that he had a right to supplement the report with his own statement about the debt, and did not make any notation in the credit report that the obligation was disputed.

On April 10, shortly before the final mortgage decision by Texas Homestead, Mrs. Sepulvado called CSC directly for the last time to complain again that the CSC entry was inaccurate because it led the mortgage company to believe that the $12,333 entry related to a 1994 personal loan rather than a 1988 mortgage foreclosure. Once again, CSC refused to correct or supplement the entry to indicate that the obligation actually arose from the 1988 foreclosure.

V. Rejection of the Mortgage Application and Subsequent Efforts to Obtain Documentation

The Sepulvados informed Texas Homestead, through Ms. Jamison, that the negative item related to the 1988 University Savings...