Pay for Delete Agreements: Still Legal, Still the Loophole You Aren't Supposed to Know About

This post represents the Scrub's ultimate pay for delete mythbuster. It is required reading.

The Scrub is getting tired of all the bad credit repair advice floating around the internet like an unflushed turd. It really gets old after a while.

Credit Report Scrub has been online for at least 10,000 years. Why does bad advice still exist?

Oh yeah, the creditors of the world want you to remain debt slaves, paying them 79.9% on a credit card.

The Scrub is still reading information from the collection agencies and "experts" of the internet that pay for delete agreements are in violation of the Fair Credit Reporting Act...for instance, this guy at BankRate, who wrote a really good advice piece on pay for delete agreements, only to have his work destroyed by a cancerous addendum cautioning the reader that, gasp, collection agencies might not like following the advice here because they say it is illegal.

Oh, the horror!

Collection agencies are the scum of the Earth, and many will do anything to get paid. Like dressing up like cops and holding mock courts for debtors. Or threatening to have your kids taken away by child protective services. Or calling you ten times a day in violation of the Fair Debt Collection Practices Act. Or threatening to send you to jail.

For starters.

But whoa, there, chief, don't be asking them to do something that they say is illegal. Why, even though they will break every law known to man, and probably some not known to man, the fact that they can claim that "Pay for delete agreements violate the FCRA" with a straight face, cite no specific section to support their claim, and get people to go along with it is laughable. Absolutely fucking laughable.

The Scrub has already dealt with this argument before, in the appropriately titled entry Are Pay for Deletion Agreements Legal?, answering in the affirmative. However, the Scrub feels the need to make a more complete effort this time, destroying this myth once and for all.

One more time, with feeling...

Specifically, when a bank, or a collection agency, or a law firm, or a jet ski repossession outfit turns down your offer to pay for delete, they will often point to your offer as being "in violation of the Fair Credit Reporting Act", right?

Do they ever, specifically, refer you to which section you are asking them to violate? Probably not. If you do luck out, or be enough of a prick to force them to tell you, then the section that they will refer to is Section 623.

The Scrub has referenced 623 quite a bit on the site. He'll put it here and there, in bits and pieces. But never before has he annotated the whole damned thing, with comments, in a way that his minions could read and understand.

Why has he not done that yet? Good question, with no good answer.

Therefore, let's do this.

Here is the ever-hyped Section 623, in easily digestible parts, with the relevant pieces left in and the irrelevant shit removed. We will use a hypothetical debt scenario (you, a bank, TransUnion, and a jet ski loan that may or may not be charged off) to flesh out the language:

§ 623. Responsibilities of furnishers of information to consumer reporting agencies

(a) Duty of Furnishers of Information to Provide Accurate Information
(1) Prohibition
(A) Reporting information with actual knowledge of errors. A person shall not
furnish any information relating to a consumer to any consumer reporting
agency if the person knows or has reasonable cause to believe that the
information is inaccurate.

What does this mean?

It means that your bank cannot report you to TransUnion as delinquent on your jet ski loan if you are current.

(B) Reporting information after notice and confirmation of errors. A person shall
not furnish information relating to a consumer to any consumer reporting
agency if
(i) the person has been notified by the consumer, at the address specified by
the person for such notices, that specific information is inaccurate; and
(ii) the information is, in fact, inaccurate.

What does this mean?

It means that if you file a dispute with the bank, and the bank determines that you were right and they were wrong about you being delinquent on the jet ski loan, the bank cannot keep reporting their wrong information to TransUnion.

(D) Definition. For purposes of subparagraph (A), the term “reasonable cause to
believe that the information is inaccurate” means having specific knowledge,
other than solely allegations by the consumer, that would cause a reasonable
person to have substantial doubts about the accuracy of the information.

What does this mean?

Suppose that the bank says you were delinquent on the jet ski loan due to a simple clerical error. They were wrong, you were current. If they had spent five seconds reviewing their records, they would quickly discover their error and realize that you were current. Even though they did not actually know, their blatant, American Banker-style incompetence would probably find them being "deemed" to have known, because a reasonable banker would know to check their records (note that the Scrub is assuming the judge is not bought and paid for by the bank).

(2) Duty to correct and update information. A person who
(A) regularly and in the ordinary course of business furnishes information to one
or more consumer reporting agencies about the person's transactions or ex-
periences with any consumer; and
(B) has furnished to a consumer reporting agency information that the person
determines is not complete or accurate, shall promptly notify the consumer
reporting agency of that determination and provide to the agency any correc-
tions to that information, or any additional information, that is necessary to
make the information provided by the person to the agency complete and
accurate, and shall not thereafter furnish to the agency any of the information
that remains not complete or accurate.

What does this mean?

If the bank has reported you to TransUnion, charged it off and reported it unpaid, and you try to do a Pay for Delete agreement, if they agree to do the PFD agreement then there is nothing here that would keep them from arguing that their continued reporting of the debt as unpaid is prohibited.

This is because the debt, now paid, is still reported as unpaid. Surprise, this makes the reported debt inaccurate because the tradeline has not been updated to reflect paid status. Removing the entire account is a way to correct the violation of this section. There is nothing here to prohibit doing so, as we will read later.

(5) Duty to Provide Notice of Delinquency of Accounts
(A) In general. A person who furnishes information to a consumer reporting
agency regarding a delinquent account being placed for collection, charged to
profit or loss, or subjected to any similar action shall, not later than 90 days
after furnishing the information, notify the agency of the date of delinquency
on the account, which shall be the month and year of the commencement of
the delinquency on the account that immediately preceded the action.

What does this mean?

Your bank chooses to report your charged off jet ski loan to TransUnion. This states they have to provide notice of the date of first delinquency.

Note that the language states "a person who furnishes information..." which is a qualifier, indicating that not all persons fall under this heading...just those people who furnish information. Thus, if your bank chooses not to report your delinquent jet ski loan, they do not fall under this heading. The bank would be a person choosing not to furnish information, of which there is no liability under the FCRA for being.

Wait, did you just say that a bank is a person?

Yep. In the US, corporations are people. You think that is stupid? Well, what really sucks is that corporations have more rights than you do.

Back to the topic at hand.

(B) Rule of construction. For purposes of this paragraph only, and provided that
the consumer does not dispute the information, a person that furnishes infor-
mation on a delinquent account that is placed for collection, charged for
profit or loss, or subjected to any similar action, complies with this
paragraph, if –
(i) the person reports the same date of delinquency as that provided by the
creditor to which the account was owed at the time at which the com-
mencement of the delinquency occurred, if the creditor previously
reported that date of delinquency to a consumer reporting agency;
(ii) the creditor did not previously report the date of delinquency to a
consumer reporting agency, and the person establishes and follows
reasonable procedures to obtain the date of delinquency from the creditor
or another reliable source and reports that date to a consumer reporting
agency as the date of delinquency; or
(iii) the creditor did not previously report the date of delinquency to a con-
sumer reporting agency and the date of delinquency cannot be reasonably
obtained as provided in clause (ii), the person establishes and follows
reasonable procedures to ensure the date reported as the date of delin-
quency precedes the date on which the account is placed for collection,
charged to profit or loss, or subjected to any similar action, and reports
such date to the credit reporting agency.

What does this mean?

More date of first delinquency shit. This is what is called a "Safe Harbor Provision" in a statute. It basically tells the bank what they can do to cover their ass and avoid liability under this section.

The only reason the Scrub includes it here is because it explicitly states "provided that the consumer does not dispute the information", which is important. Why? Because every good PFD letter will avoid admitting liability for the underlying debt, instead choosing to dispute the underlying debt while offering to settle. Thus, this section would not apply to properly phrased PFD agreements.

(7) Negative Information
(A) Notice to Consumer Required
(i) In general. If any financial institution that extends credit and regularly
and in the ordinary course of business furnishes information to a consumer
reporting agency described in section 603(p) furnishes negative infor-
mation to such an agency regarding credit extended to a customer, the
financial institution shall provide a notice of such furnishing of negative
information, in writing, to the customer.
(ii) Notice effective for subsequent submissions. After providing such notice,
the financial institution may submit additional negative information to a
consumer reporting agency described in section 603(p) with respect to the
same transaction, extension of credit, account, or customer without
providing additional notice to the customer.

What does this mean?

The Scrub includes this part just to show you that your rights are your rights, and it is important to use them or you will certainly lose them.

This section says that the bank "shall" notify you of the delinquent jet ski account being reported to TransUnion. Note the word "shall". In statutory construction, "shall" is a command. THOU SHALL NOT REPORT THINE CHARGE-OFF TO TRANSUNION WITHOUT NOTIFYING JIMBOB, SON OF JEDIDIAH.

Do you see "shall" in anything like, say, "all lenders shall report every delinquent account on their books to every credit reporting agency currently in business"? Of course not.

But Scrub! Just because the law is silent here is not indicative of that requirement being elsewhere!

When the Feds want to force someone to do something, they do it and are pretty up front about it. For example, student loans must be reported to at least one major credit bureau. Hell, even the Internal Revenue Code is explicit in using the terms "shall" and "all".

(b) Duties of Furnishers of Information upon Notice of Dispute
(1) In general. After receiving notice pursuant to section 611(a)(2) [§ 1681i] of a dispute
with regard to the completeness or accuracy of any information provided by a person
to a consumer reporting agency, the person shall
(A) conduct an investigation with respect to the disputed information;
(B) review all relevant information provided by the consumer reporting agency
pursuant to section 611(a)(2) [§ 1681i];
(C) report the results of the investigation to the consumer reporting agency;
(D) if the investigation finds that the information is incomplete or inaccurate, re-
port those results to all other consumer reporting agencies to which the person
furnished the information and that compile and maintain files on consumers
on a nationwide basis; and
(E) if an item of information disputed by a consumer is found to be inaccurate or
incomplete or cannot be verified after any reinvestigation under paragraph (1),
for purposes of reporting to a consumer reporting agency only, as appropriate,
based on the results of the reinvestigation promptly–
(i) modify that item of information;
(ii) delete that item of information; or
(iii) permanently block the reporting of that item of information.

What does this mean?

It means that if the bank ends up reporting inaccurate/incomplete/unverifiable information, they can modify the account, delete the piece of information that is wrong for the account, or delete the entire account. Yes, they actually use the word "delete". Amazing, huh?

Thus ends the relevant sections of 623. Now we will segue into answering some questions raised by this analysis.

1. But Scrub! If the collection agencies, junk debt buying law firms, and banks of the world wanted to have everything reported, why was the law not drafted with "shall" language?

Because doing so would create something called "an affirmative legal duty to report". Suppose the law did contain that "shall" provision, requiring every single debt to be reported. What does that look like?

It would lead to absurdities like forcing every extender of credit, even places like Wal-Mart or Jimbob's TV Shack, to report everything they do to TransUnion. What about layaway? Does that count as an extension of credit? What about a small time accountant's "floating 30 day account" with Staples? See the point?

Do you think they want that much liability hanging out there? Of course not. There are something like 500 quadrillion consumer credit transactions every second.

Also, to be effective, it must be the case that premature removal of the debt would end up creating liability prior to the expiration of the maximum reporting time. This gets kind of complicated, so bear with the Scrub.

Suppose the debt "shall" be reported. Well, to make that part of statute have teeth, the time frame for reporting debts no longer becomes a maximum permitted, but rather a minimum required. Why is this so?

Because if the debt is to be reported for 7.5 years, for example, but you can remove it at 3 years with no liability, then that would swallow up the entire "shall be reported" language, right? What is the point if the debt could be removed at any time once the debt is reported? Under this interpretation, debts could be reported for five minutes, a PFD agreement could be executed, and the debt could be removed in another five minutes and the entire transaction would be well within this interpretation.

Then, obviously, the "shall be reported" language would simply indicate that the debt "shall be reported" for whatever time frame the creditor chooses to require. The end result would be the same situation as we have now i.e. creditors, collectors, and credit reporting agencies worried about consumers proposing PFD agreements.

Then, of course, if you force the creditors to report everything and require them to report for the maximum time frame allowed, you have put the creditors and collectors into a precarious position. How much would that cost businesses and consumers in compliance costs? What if they remove the debt a week early? What liability exists under the statute for that? What if they report a debt in error for fear of being caught for not reporting? What if they require further investigation of a debt to ensure accurate reporting? Does the statute, under this interpretation, result in more harm than good?

And to finish this point, the whole issue of enforcement comes into play under this "shall be reported" interpretation. Does the FTC have the resources to ensure that Jimbob is complying with this strict interpretation of the FCRA? Of course not. Do the states? No. Does anybody else? Maybe Superman.

2. But Scrub! Why do they claim that there is "an affirmative legal duty to report" if it does not actually exist?

Because if PFD agreements become widely known and utilized, it undercuts the entire credit reporting model.

The credit reporting agencies of the world are only as good as the information in their database. They have billions invested in collecting the information, and the creditors and collectors of the world have billions more invested on the good word of those reporting agencies. Poison the well, and the water becomes undrinkable.

The only possible source of an affirmative legal duty to report, at least in simple consumer transactions like those we have been discussing, could come from the bank's contract with the credit reporting agency. Note, however, that the contract between the bank and, say, TransUnion, has nothing to do with you personally vis a vis legal duties. That is a completely private matter between two private "persons". The law governing those disputes is simple contract law, not the FCRA, FDCPA, or whatever acronym you can think of.

In other words, the bank is free to contract with you however they see fit, within the contours of the law of course. This would include PFD agreements, as we have seen. Any disagreements/breach of contract claims for the credit reporting agency due to PFD agreements would be against the bank. The fact that the chance of discovering a private PFD agreement between a bank and a debtor is between zero and less than 1% is what frightens the more rational actors on the scene.

3. Why would some banks choose to accept PFD agreements even knowing the possible ramifications of widespread use?

Game Theory:

So Long Sucker (real title "Fuck You, Buddy" -Scrub) is a board game invented in 1950 by John Forbes Nash, Mel Hausner, Lloyd S. Shapley and Martin Shubik. It is a four-person bargaining/economic strategy game. Each player begins the game with 7 chips, and in the course of play, attempts to acquire all the other players' chips. This requires making agreements with the other players which are ultimately unenforceable. To win, players must eventually renege on such agreements.

In other words, the short term profits that come from collecting on long-delinquent accounts entice some creditors and collectors into breaking agreements they have made with credit reporting agencies, regardless of the possible long-term effects. This is how they, as temporary participants who will be long gone before the long term effects are felt, "win" the game.

The Scrub helps you take notice of the what "the game" is, who is playing it, and how you can benefit yourself. And you thought this site was just free credit repair advice and curse words written by a giant Eagle with a beard? For shame.

4. Why do they lie about PFD agreements all the time?

This may surprise you, but it is not illegal to lie on the internet or on network TV.

What the more rational, long-term minded creditors and collectors of the world are doing is creating the perception of an affirmative legal duty to report in order to get all of the benefits that come with it (better databases, better information) without any of the liability that attaches to creating such a duty (like those absurdities the Scrub referenced a few moments ago). The problem they have is that there is (probably) no good way to draft the laws to achieve this "all benefits for me, no liability for me" goal. So they lie and bullshit.

However, it simply doesn't have the same "oomph" factor to tell you "Sorry, Mr. Smith, we will not accept your PFD agreement because we have a contract with TransUnion and we believe in the sanctity of contracts". Instead, they just cite generic laws and hope you don't have a Bar License or know an attorney.

5. Okay Scrub! The BankRate guy you linked to earlier claims that a collection agent complying with a pay for delete is in violation of the FCRA. I understand your argument. However, the BankRate guy seems to know his shit too. Can you give me an example of where his statement might be correct, so that I may understand why he wrote what he did?

Sure.

Suppose you have the same hypo we discussed earlier (jet ski, bank, etc.). You go 180 days delinquent, the bank charges you off, and your FICO score drops a few million points. You offer a PFD letter. Instead of requesting total deletion of the account, though, you request that the lender reports you as "Paid in Full, Never Late". That is, clearly, inaccurate information and if honored would, in the Scrub's opinion, be in violation of the FCRA.

With that said, it is arguable whether this is even a true PFD agreement. Instead, it sounds more like the purchase of a positive tradeline, which is quite illegal, or simple bribery, which is also quite illegal.

The Scrub is not aware of the qualifications of the guy cited earlier, but the Scrub thinks he is confusing two very different concepts. Please note the distinction. PFD seeks complete removal of the account. The hypo offered by the BankRate guy sounds more like tradeline purchasing, or outright bribery, neither of which is recommended.

6. So, do creditors and collectors have to take a PFD agreement?

Of course not. They are free to chose whether or not to do so.

***

There you go. Hopefully, this will put this issue to rest once for all.