On January 9, 2019, the U.S. Court of Appeals for the Ninth Circuit held that Fannie Mae is not a consumer reporting agency under FCRA, and is therefore not liable under FCRA for inaccurate information generated by its proprietary software – Desktop Underwriter (DU) – that it licenses to lenders for use in determining if a loan is eligible for purchase by Fannie Mae.
Fannie Mae purchases loans from certain lenders that are originated in compliance with its Selling Guide. The Selling Guide provides, among other things, that Fannie Mae will not purchase a loan if the borrower experienced a foreclosure within the past seven years, or a short sale within the past two years. The plaintiffs in this case had 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 DU – which automatically applies the Selling Guide’s guidelines and requirements – to determine the loan’s eligibility for purchase by Fannie Mae. Three of the eight DU findings stated that the loan was ineligible due to a foreclosure within the last seven years, even though it is undisputed that the plaintiffs were not subject to a foreclosure during that time period. The plaintiffs sued Fannie Mae, arguing that it violated FCRA, which requires a consumer reporting agency to follow “reasonable procedures to assure maximum possible accuracy” of consumer information, when its DU software incorrectly reported the foreclosure. The lower court ruled in the plaintiffs’ favor, holding that Fannie Mae acts as a credit reporting agency when it licenses DU to lenders, and is liable under FCRA for the inaccurate information generated by DU.
The Ninth Circuit disagreed, holding that Fannie Mae is not a consumer reporting agency under FCRA because it does not assemble or evaluate consumer credit information or other consumer information for the purpose of furnishing consumer reports to third parties. The Ninth Circuit determined that Fannie Mae does not assemble or evaluate such information when creating, licensing, and updating DU, or when a lender uses DU, and that lenders decide whether to use the information to create DU findings. Rather, the Ninth Circuit found that DU is merely a tool for lenders to assemble and evaluate such information, noting that “when a person uses a tool to perform an act, the person is engaging in the act; not the tool’s maker.” The court further noted that its interpretation of FCRA aligns with prior FTC guidelines stating that a seller of software to a company that uses the software product to process credit report information is not a consumer reporting agency under FCRA because it is not assembling or evaluating any information.
Although the Ninth Circuit acknowledged that Fannie Mae’s DU licensing agreement is inconsistent about who Fannie Mae considers to be obtaining and processing information when using DU, it determined that the agreement’s description of Fannie Mae’s actions is not probative of what Fannie Mae actually does. The court also found that while Fannie Mae stores backups of DU-generated case files and updates the DU database requirements for information imported from credit bureaus, such activities are not equivalent to assembling or evaluating information for the purpose of furnishing a credit report. Finally, the court concluded that even if Fannie Mae were assembling or evaluating consumer information as a result of DU, it is doing so only to facilitate a transaction between the lenders and Fannie Mae, and not for the purpose of furnishing consumer reports to third parties.
The Ninth Circuit reversed and remanded the case with instructions to enter judgment in favor of Fannie Mae, and vacated an award of attorney’s fees and costs to the plaintiffs.