By Nicole D. Prysby, J.D.
Fannie Mae is not a consumer reporting agency under the Fair Credit Reporting Act (FCRA) because it does not regularly engage in the practice of assembling or evaluating consumer information but merely provides software that allows lenders to assemble or evaluate such information, held the federal Ninth Circuit Court of Appeals. Lenders use the software to determine whether a loan would be eligible for purchase by Fannie Mae. Lenders assemble the consumer information by inputting it into Fannie Mae’s software tool or electronically importing reports from credit bureaus. In the process of creating, licensing, and updating the software, Fannie Mae does not assemble or evaluate consumer information, but merely provides a tool for lenders to do so. Therefore, Fannie Mae is not liable under the FCRA, due to its software incorrectly communicating to lenders that consumers had a foreclosure reported within the past seven years. The dissent argued that when Fannie Mae took the additional step of reporting that the consumers had a prior foreclosure—i.e., reporting consumer credit information—it took on the role, and the responsibilities, of a consumer reporting agency (Zabriskie v. Federal National Mortgage Association, Jan. 9, 2019, Wallace, J.).
Background. Fannie Mae’s Selling Guide states that Fannie Mae will not purchase a loan if the borrower experienced a short sale within the past two years. The consumers experienced a short sale after defaulting on their prior mortgage. After waiting two years, they attempted to refinance their current mortgage, and a number of lenders used Fannie Mae’s Desktop Underwriting (DU) software tool to ascertain whether a loan would be eligible for purchase by Fannie Mae. Three of the eight DU findings stated that the loan was ineligible due to a foreclosure reported within the last seven years. It was undisputed that the consumers did not have a prior foreclosure within the last seven years. The consumers sued Fannie Mae, arguing that it falsely communicated to potential mortgage lenders that they had a prior foreclosure on a mortgage account. They sued under the FCRA, which requires a consumer reporting agency to follow "reasonable procedures to assure maximum possible accuracy" of consumer information (15 U.S.C. § 1681e(b)).
The district court held that Fannie Mae acts as a consumer reporting agency when it licenses the DU tool to lenders and that it is therefore subject to the FCRA. The case went to trial, and the jury returned a verdict for the consumers, awarding $30,000 in damages, $652,711 in attorney fees, and $68,312 in costs. On appeal, Fannie Mae argued that it was not liable under the FCRA because it is not a consumer reporting agency.
Fannie Mae is not a "consumer reporting agency" under the FCRA. Fannie Mae argued that it is not a consumer reporting agency because it does not regularly engage in the practice of assembling or evaluating consumer information, but merely provides software that allows lenders to assemble or evaluate such information. The Ninth Circuit agreed. Fannie Mae does not assemble or evaluate information when a lender uses DU. Lenders assemble the consumer information by inputting it into DU or electronically importing reports from credit bureaus. Lenders contract with and pay the credit bureaus for the reports. Lenders decide if and when to evaluate the information to create DU Findings. In the process of creating, licensing, and updating DU, Fannie Mae does not assemble or evaluate consumer information. DU is merely a tool for lenders to do so. And when a person uses a tool to perform an act, the person is engaging in the act; the tool’s maker is not. Fannie Mae stores backups of case files generated from the software and updates the DU database with information from credit bureaus, but those activities are not equivalent to assembling or evaluating information for the purpose of furnishing a consumer report. Although the DU licensing agreement is inconsistent about who Fannie Mae considers to be processing information when using DU, the agreement it not probative of what Fannie Mae actually does.
This interpretation aligns with 2011 guidelines issued by the FTC, which opined that a seller of software to a company that uses the software product to process credit report information is not a consumer reporting agency because it is not assembling or evaluating any information.
The court agreed with Fannie Mae’s argument that even if it were assembling or evaluating consumer information as a result of DU, it did not do so for the purpose of furnishing consumer reports to third parties. The DU merely facilitates a transaction between the lender and Fannie Mae.
The court also found that Congress intended to exclude Fannie Mae from the definition of consumer reporting agency. If Fannie Mae were a credit reporting agency, it would be required to comply with various FCRA duties towards borrowers, such as disclosures. This would contradict Congress’s design for Fannie Mae to deal directly with lenders, and not to deal with borrowers themselves.
Dissent. Judge Lasnik dissented, arguing that had Fannie Mae simply reviewed the relevant data and issued a recommendation on whether or not it would purchase the loan, there would likely be no plausible claim under the FCRA. But when Fannie Mae took the additional step of reporting that the consumers had a prior foreclosure—i.e., reporting consumer credit information—it took on the role, and the responsibilities, of a consumer reporting agency. Because DU produces a recommendation on whether or not Fannie Mae—the software provider itself—will ultimately purchase the loan that its own software analyzed for eligibility, Fannie Mae retains a strong connection with the processed information. The dissent also disagreed with the majority’s holding that the purpose of DU tool is only to inform lenders of whether or not Fannie Mae will purchase a loan. The findings include information about the loan, the property, the consumer’s credit history and credit scores, any risk factors, existing credit and liabilities, the consumer’s employment and income, a proposed monthly payment, guidance to lenders, and conditions for Fannie Mae’s approval. This is information bearing on a consumer’s creditworthiness.
The consolidated cases are Nos. 17-15807 and 17-16000.
Attorneys: Sylvia A. Goldsmith (Goldsmith & Associates, LLC) for Richard Zabriskie and Kristin Zabriskie. Deanne E. Maynard (Morrison & Foerster LLP) for Federal National Mortgage Association, a/k/a Fannie Mae.
Companies: Federal National Mortgage Association, a/k/a Fannie Mae
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