Ninth Circuit's Definition Of "Consumer Reporting Agency" Will Help Lenders Stay Compliant, But Dissent May Presage Future Litigation

A divided panel of the Ninth Circuit recently published a decision in Zabriskie v. Federal National Mortgage Association, in which the court addressed the question of whether Fannie Mae's use of proprietary underwriting software meant that it qualified as a Consumer Reporting Agency for the purposes of the Federal Credit Reporting Act (the "FCRA") which, among other things, governs certain Consumer Reporting Agency conduct. Both the Ninth Circuit majority and dissent undertook a detailed analysis of the criteria for determining what constitutes a Consumer Reporting Agency under the FCRA, and each serves as a helpful guide to lenders engaging in mortgages, loan servicing, or consumer credit reporting to avoid inadvertent designation and possible noncompliance. The dissenting opinion may also provide a blueprint for future litigants seeking to challenge an entity's conduct on the basis of alleged FCRA violations.

Providing Consumer Credit Evaluation Software Does Not Make One a 'Consumer Reporting Agency' 

Under the FCRA, Consumer Reporting Agencies are defined as persons who regularly engage in the practice of assembling or evaluating consumer credit information for the purpose of furnishing consumer reports to third parties. 15 U.S.C. § 1681a(f).

In Zabriskie, Fannie Mae was sued by a consumer for violations of the FCRA based on alleged misreporting of credit information in reports generated via Fannie Mae's proprietary underwriting software, called Desktop Underwriter ("DU"). Fannie Mae licenses DU to lenders, and the software allows lenders to generate reports based on consumer information, called DU Findings, that state whether a particular loan would be eligible for purchase by Fannie Mae in the secondary market.

Multiple DU Findings were generated by Zabriskie's prospective lenders, many of which indicated the loan would be ineligible for purchase by Fannie Mae as a result of a prior foreclosure, which never actually occurred. Zabriskie sued Fannie Mae based on the inaccurate reporting claiming that Fannie Mae was responsible because its conduct rose to the level of a Consumer Reporting Agency as defined by the FCRA. The District Court agreed and summary judgment was entered in favor of Zabriskie.

On appeal, the majority panel of the Ninth Circuit determined that Fannie Mae does not meet the definition of Consumer Reporting Agency. The majority determined that DU, as utilized by lenders in their underwriting process, is merely a tool, and that the lenders – not Fannie Mae – are the parties engaged in assembling and evaluating credit information. The majority further found that DU and DU Findings are not intended to furnish consumer reports to third parties, but rather merely to provide guidance as to a loan's eligibility for purchase by Fannie Mae. Accordingly, the majority reversed and remanded with instructions for judgment to be entered in favor of Fannie Mae.

Dissent Views Fannie Mae as More Than Merely a Technology Company

In his dissent, Judge Robert S. Lasnik contended that Fannie Mae was much more than a provider of an underwriting tool. Judge Lasnik maintained that Fannie Mae's "outsized role in mortgage lending and mortgage markets, its control over the use of the technology, and its keen interest in the creditworthiness of the consumers whose information DU assembles and evaluates," demonstrates that Fannie Mae's self-characterization as a mere software provider is no more than a "smokescreen, akin to Uber Technologies, Inc.'s attempt to masquerade as a technology company rather than a transportation company." Judge Lasnik further reasoned that DU's purpose extended beyond merely identifying eligibility for purchase determinations because the DU Findings also include implicit approval recommendations, suggesting that its underlying purpose is to enable lenders to make informed lending decisions based on consumer information subject to the FCRA. On that basis, Judge Lasnik indicated that he would have designated Fannie Mae as a Consumer Reporting Agency subject to FCRA restrictions.

Future Considerations

While the majority decision in Zabriskie means that Fannie Mae's licensing of DU does not make it a Consumer Reporting Agency for the purposes of the FCRA, the reasoning underling the Zabriskie dissent may provide a roadmap for future litigants seeking to establish an entity's status as a Consumer Reporting Agency, particularly where an entity provides or utilizes information in a manner that potentially enables lenders to make underwriting decisions based on specific consumer credit information.