The U.S. Court of Appeals for the Ninth Circuit recently held that a government sponsored enterprise (“GSE”) that licensed underwriting software to lenders was not a consumer reporting agency under the federal Fair Credit Reporting Act.

In so ruling, the Ninth Circuit determined that the GSE did not assemble or evaluate consumer information to furnish consumer reports to third parties. Instead, the GSE merely provided software to allow lenders to assemble or evaluate such information.

A copy of the opinion in Zabriskie v. Federal National Mortgage Association is available at: Link to Opinion.

The plaintiffs had a short sale after defaulting on their mortgage. After waiting two years, they attempted to refinance their mortgage and a number of lenders used a software called Desktop Underwriter (“DU”) to ascertain whether a loan to them would be eligible for purchase by the GSE.

The GSE created DU to allow lenders to enter the information about the borrower and the property. DU automatically applies the guidelines and requirements in the GSE’s selling guide. The lender can also contract with credit bureaus to pay for and import the borrower’s credit report into DU. The lender then uses DU to underwrite the loan.

DU analyzes all the inputted or imported information and provides a report called “DU Findings” on a loan’s eligibility for purchase by the GSE. The GSE is not involved in the process of generating DU Findings.

Three of the eight DU Findings created in evaluating the plaintiffs’ prospective loan stated that the loan was ineligible due to a foreclosure reported within the last seven years — which was inaccurate.

The plaintiff sued the GSE 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).

On cross-motions for summary judgment, the district court held that the GSE acted as a consumer reporting agency when it licensed DU to lenders and it was therefore subject to the FCRA.

The case went to trial and the jury was instructed that “[i]n connection with its actions in this case [the GSE] is a ‘consumer reporting agency,’ [and] the DU findings are ‘consumer reports.'” The jury returned a verdict for the plaintiffs and awarded $30,000 in damages. The trial court also awarded attorneys’ fees and costs under FCRA’s fee shifting provision.

On appeal, the GSE argued that it was not liable under the FCRA because it was not a consumer reporting agency.

As you may recall, the FCRA defines a consumer reporting agency as “any person which [1] regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers [2] for the purpose of furnishing consumer reports to third parties.” 15 U.S.C. § 1681a(f).

The Ninth Circuit observed that the GSE did not assemble or evaluate information when a lender uses DU. Lenders assembled the consumer information by inputting it into DU, and lenders themselves contracted with and paid the credit bureaus for the reports. Apart from creating, licensing, and updating DU, the GSE did not assemble or evaluate consumer information. Instead, the Ninth Circuit found that DU was merely a tool for lenders to do so at their own choosing.

Additionally, the Ninth Circuit noted that its interpretation of the FCRA aligned with the Federal Trade Commission’s guidelines, 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 plaintiffs argued that the GSE stored backups of software-generated case files and updated DU’s database requirements for information imported from credit bureaus. In the Ninth Circuit’s view, none of this activity demonstrated that the GSE assembled or evaluated information for the purpose of furnishing a consumer report. Instead, the GSE merely provided software that allowed lenders to assemble or evaluate such information.

The plaintiffs also argued that the GSE’s licensing agreement with the lenders stated that: “[a]s Licensee’s agent, [GSE] shall, and is hereby expressly authorized by Licensee to obtain Consumer Credit Data for the sole purpose of performing a Prequalification Analysis and/or making an underwriting recommendation.”

The Ninth Circuit observed that the agreement also stated that it was the licensee-lender who used DU “to request and receive Consumer Reports and/or analyze or evaluate Consumer Credit Data in underwriting Mortgage Loan Applications.” Thus, evidence of what the GSE described itself in the licensing agreement was not what the GSE actually did.

Next, the GSE argued that it was not a consumer reporting agency because it did not assemble or evaluate consumer information for “the purpose of furnishing consumer reports to third parties.” 15 U.S.C. § 1681a(f).

As you may recall, FCRA defines “consumer report as any communication by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of servicing as a factor in establishing the consumer’s eligibility for credit, insurance, employment, or other statutorily enumerated purposes.” 15 U.S.C. § 1681a(d)(1).

The GSE argued 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. Instead, its purpose is only to facilitate a transactions between the lender and the GSE.

The Ninth Circuit agreed based on the plain meaning of “purpose.” DU determined whether a loan was eligible for purchase by the GSE based only on information provided to it by lenders and credit bureaus. DU contained no evaluation or new information regarding the borrower’s creditworthiness that was not already provided by the lender or credit bureau. The Ninth Circuit did not find any evidence indicating that the GSE assembled or evaluated consumer information.

The Ninth Circuit further observed that FCRA imposed duties on consumer reporting agencies to provide a variety of disclosures to consumers. If the GSE was a consumer reporting agency under FCRA, it would be required to comply with the disclosure requirements and that interpretation would contradict Congress’ design for the GSE to operate only in the secondary mortgage market to deal directly with lenders, and not with borrowers themselves.

Accordingly, the Ninth Circuit reversed the trial court’s judgment in favor of the plaintiffs and remanded with instructions to enter judgment in favor of the GSE.