When Robbie Robertson wrote the well-known lyrics to The Band’s song “The Weight,” the “Fannie” referenced in the chorus was certainly not Fannie Mae (the Federal National Mortgage Association.)  However, this week the United States Court of Appeals for the Ninth Circuit followed the song’s suggestion and took a load off Fannie by reversing the district court’s decision that Fannie Mae is a consumer reporting agency (CRA) within the meaning of FCRA.  Zabriskie v. Federal National Mortgage Association.

Fannie Mae purchases mortgage loans, subject to guidelines and requirements published in a manual called the “Selling Guide.”  For example, Fannie Mae will not purchase a loan if a borrower was the subject of a foreclosure within the last seven years or if the borrower experienced a short sale within the last two years.  Lenders can use the Selling Guide to determine whether Fannie Mae would purchase loans they are originating.  In this age of automation, such a manual process borders on being uncivilized, so lenders can also license Fannie Mae’s proprietary software called Desktop Underwriter (DU).  DU allows a lender to enter the borrower’s information and import credit information from the major credit bureaus.  It will then apply Fannie Mae’s guidelines to determine a loan’s eligibility for purchase.

The Zabriskies had defaulted on their prior mortgage, and their property was disposed of by short sale.  After waiting two years, the Zabriskies attempted to refinance their current mortgage.  Several lenders used DU to determine whether Fannie Mae would buy the refinanced mortgage.  The resulting DU report incorrectly indicated that the loan would be ineligible for sale to Fannie Mae because the Zabriskies had been the subject of a foreclosure within the last seven years.  The Zabriskies sued Fannie Mae under FCRA for failing to follow “reasonable procedures to assure maximum possible accuracy.”  The district court held that Fannie Mae is a CRA when it licenses DU to lenders.  The case went to trial, and a jury awarded $30,000 in damages, plus more than $700,000 in attorney’s fees and costs.

On appeal, a divided panel held Fannie Mae is not a CRA, because it does not regularly engage in the practice of assembling or evaluating consumer information.  Instead, it merely creates a tool for lenders to assemble and evaluate prospective borrowers’ information.  In addition, the majority concluded that—even if Fannie were assembling or evaluating consumer information—it did not do so for the purpose of furnishing consumer reports to third parties.  Instead, DU serves the same purpose as the Selling Guide—to inform lenders as to whether Fannie Mae will purchase their loans.  It does not determine whether a lender should originate a loan.

Judge Robert S. Lasnik, United States District Judge for the Western District of Washington sitting by designation, disagreed and wrote a thorough dissent.  He rejected the majority’s reference to DU as a mere tool for lenders to use.  He explained, “To the extent DU can be analogized to a mechanical tool such as a laser measurer, it would be as if Fannie Mae allowed licensees to purchase access to measurements obtained with the tool, but did the measuring itself.”  His dissent rejects the notion that Fannie Mae is nothing more than a software developer providing a technological resource to lenders, stating that, “The characterization of Fannie Mae as a software provider is a smokescreen, akin to Uber Technologies, Inc.’s attempt to masquerade as a technology company rather than a transportation company.”  At the core of Judge Lasnik’s dissent is his concern the report resulting from the use of DU is not a simple conclusion that Fannie Mae will, or will not, buy the loan.  Instead, it is a five to six page report with information about the borrower and guidance to lenders that, according to the dissent, lenders use in deciding whether to originate the loan at all.  Consequently, Judge Lasnik concluded that, “To hold that Fannie Mae is not a consumer reporting agency is to deny consumers any sort of recourse from these grave and consequential errors.”

So, for the moment, Fannie Mae is not a CRA in the Ninth Circuit.  Given the potentially significant effects of an error in the DU report and the divided opinion in Zabriskie, it is reasonable to expect that this will not be the last or only decision addressing the question of whether Fannie Mae acts as a CRA in licensing DU to lenders.