On May 29, the Ninth Circuit ruled that an end-user’s misuse of reported information does not render a credit reporting agency’s report inaccurate for purposes of liability under the Fair Credit Reporting Act. The Court affirmed the district court’s grant of summary judgment in the putative class action case brought against a national credit reporting agency (“CRA”).

The action centered on the CRA’s reporting of short sales and foreclosures. In reporting a short sale, the CRA coded the account with a “9-68.” The lead code of “9” indicated “Settled” and the “68” indicates “Acct legally paid in full for less than the full balance.” In reporting a foreclosure, the CRA coded the account with an “8-94,” indicating “Creditor Grantor reclaimed collateral to settle defaulted mortgage.”

Although the CRA reported the two types of accounts distinctly, Fannie Mae’s software, Desktop Underwriter, treated the codes the same. Desktop Underwriter identified a mortgage account as a foreclosure if it included a lead code of either 8 or 9. Fannie Mae “knew from the instructions [the CRA] had provided that code 9 did not represent a foreclosure, and that it was ‘necessarily capturing accounts there were not actually foreclosures.’” Merging the two codes had significant adverse consequences, as consumers with a short sale were subject to a seven-year waiting period for another mortgage, rather than a two-year waiting period that normally applies to short sales.

Despite Fannie Mae’s alleged misuse of the reported information, plaintiffs John Shaw, Kenneth Coke, and Raymond Rydman brought a putative class action against the CRA. They alleged the CRA violated § 1681e(b) in failing to follow reasonable procedures to ensure maximum accuracy, § 1681i in failing to conduct a reasonable investigation, and § 1681g in failing to fully disclose their files.

In a well-reasoned opinion, the Ninth Circuit refused to impose liability on the CRA for Fannie Mae’s supposed misuse of its report. The Court first disposed of the §§ 1681e(b) and 1681i claims by concluding the reports were not inaccurate. In doing so, the Court examined whether the report was “misleading in such a way and to such an extent it could be expected to adversely affect credit decisions.” Noting the CRA’s technical manuals “unambiguously” stated the coding referred to a short sale, Fannie Mae’s treatment of the codes “does not render [the CRA’s] reporting misleading.” Any inaccuracy was due to Fannie Mae’s mistreatment, not the CRA’s own inaccuracies.

Likewise, the Court flatly rejected the plaintiffs’ argument that the CRA could be held liable because it knew Fannie Mae misused the data. The Court found no support for the suggestion that a CRA “must amend its reporting system when a subscriber disregards its technical manuals in order to avoid liability.”

The plaintiffs’ failure–to–disclose claim under § 1681g met a similar fate. The plaintiffs’ chief complaint with the CRA’s file disclosure to its consumers was that it displayed information differently than it did when reporting to customers. However, as the Court found, the CRA fulfilled its duties under § 1681g to make a clear disclosure. Use of its proprietary coding system would have run afoul of that requirement by confusing the consumer.

This decision shows that even in the plaintiff-friendly Ninth Circuit, a CRA’s liability has bounds. It also demonstrates the importance of a CRA clearly explaining its coding system to its customers. The CRA’s clear explanations within its technical manuals allowed it to escape liability for its customer’s misinterpretation of the coding system.