In a putative class action alleging violations of the federal Fair Credit Reporting Act, the US Court of Appeals for the Ninth Circuit recently held that:
(1) the credit reporting agency’s reporting of short sales was not inaccurate or misleading, even though it knew that a government sponsored enterprise misinterpreted its short sale code as a foreclosure, because FCRA does not make credit reporting agencies liable for the conduct of its subscribers;
(2) the credit reporting agency’s consumer disclosures were clear and accurate, and 15 USC. § 1681g did not require the credit reporting agency to disclose its proprietary codes that could confuse unsophisticated consumers; and
(3) the plaintiffs failed to establish a right to statutory damages because the credit reporting agency conduct was not objectively unreasonable.
The plaintiffs brought this action against a credit reporting agency alleging violations of the federal Fair Credit Reporting Act, 15 USC. § 1681, et seq., based on the credit reporting agency’s reporting of short sales and its related consumer disclosures. The credit reporting agency delivered its credit reports in a proprietary computer-generated format that displays credit information “in segments and bits and bytes,” but the credit reporting agency provides technical manuals that enable its subscribers to read and understand the credit reports they receive. As you may recall, a short sale is a derogatory credit event that furnishers report to the credit reporting agencies. When the credit reporting agency receives data reporting a short sale, it translates the data into its proprietary coding before it can export the data to subscribers. The credit reporting agency’s technical manual coded short sales as follows:
(1) Account type: A mortgage-related account, such as a first mortgage or home equity line of credit.
(2) “Account condition” and “payment status” code: 68, which corresponds to a Special Comment of “Account legally paid in full for less than the full balance.” The 68 automatically populates a 9 into the first position on the payment history grid to display the “Settled” status.
(3) Payment history grid showing the final status (“Settled”) in the first digit, followed by 24 months of payment history information.
(4) Date in 25th month in the payment history grid corresponds to the date the furnisher reported the “Settled” status to the credit reporting agency.
In other words, the credit reporting agency reported account condition code 68 (“Account legally paid in full for less than the full balance”) for short sales, which then automatically inserted the number 9 into the payment history grid (to display a “Settled” status). However, a lead payment history code of 9 can represent multiple, derogatory, non-foreclosure statuses, including “Settled, Insurance Claim, Term Default, Government Claim, Paid by Dealer, BK Chapter 7, 11 or 12 Petitioned, or Discharged and BK Chapter 7, 11 or 12 Reaffirmation of Debt Rescinded.”
Foreclosures are reported with a lead payment history code of 8 and an account condition and payment status code of 94 (“Creditor Grantor reclaimed collateral to settle defaulted mortgage”). According to the credit reporting agency’s technical manuals, it was impossible for its credit reports to reflect a foreclosure with a lead payment history code of 9. A government sponsored enterprise (“GSE”) that purchased mortgage loans from certain lenders used a proprietary underwriting software. Its rules required that a consumer with a prior foreclosure must wait seven years before obtaining a new mortgage, but consumers with a prior short sale need wait only two years. The GSE’s underwriting software analyzed credit report data from the credit reporting agencies. In doing so, the software relied on the GSE’s payment code, which corresponded to the credit reporting agency’s lead payment history code. Until 2013, the software “identified [mortgage accounts] as a foreclosure if there [was] a current status or [payment history code] of ‘8’ (foreclosure) or ‘9’ (collection or charge off).” Thus, the GSE elected to treat code 9 the same as it treated code 8, even though it knew from the instructions of the credit reporting agency that code 9 did not represent a foreclosure, and that it was “necessarily capturing accounts that [were] not actually foreclosures.” The GSE’s treatment of lead payment history code 8 and 9 imposed a seven year waiting period on consumers with a prior short sale, when the waiting period should have only been two years. In 2010, consumers and the credit reporting agency raised this issue with the GSE, but neither entity changed its coding.
Between 2012 and 2013, the plaintiffs disputed the credit reporting agency’s reporting of their prior short sales. However, the plaintiffs were able to obtain new loans after their prior short sales because their lenders either understood that they had a prior short sale, not a foreclosure, or the lender did not use the GSE’s underwriting software. In June 2013, the plaintiffs filed a putative class action against the credit reporting agency asserting claims for: (1) a reasonable procedures claim pursuant to 15 USC. § 1681e; (2) a reasonable reinvestigation claim pursuant to 15 USC. § 1681i; (3) a file disclosure claim pursuant to 15 USC. § 1681g. The plaintiffs requested damages pursuant to 15 USC. § 1681n. The case was stayed pending the Supreme Court’s resolution of Spokeo, Inc. v. Robins, 135 S. Ct. 1892 (2015). After the stay was lifted, the credit reporting agency moved for summary judgment. The trial court granted summary judgment in favor of the credit reporting agency. This appeal followed. The Ninth Circuit began its analysis on the plaintiffs’ reasonable procedures and reasonable reinvestigation claims. As you may recall, FCRA’s compliance procedures provide that: “[w]henever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” 15 USC. § 1681e(b). Liability under this reasonable procedure provision “is predicated on the reasonableness of the credit reporting agency’s procedures in obtaining credit information.” Guimond v. Trans Union Credit Info. Co., 45 F.3d 1329, 1333 (9th Cir. 1995). To bring a section 1681e claim, the “consumer must present evidence tending to show that a credit reporting agency prepared a report containing inaccurate information.” Id., 45 F.3d at 1333. Additionally, a credit reporting agency must conduct a free and reasonable investigation within 30 days of a consumer informing the agency of disputed information. 15 USC. § 1681i(a)(1)(A). Consumers must show that “an actual inaccuracy exists” for a section 1681i claim. Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 890 (9th Cir. 2010).
The plaintiffs argued that the credit reporting agency’s short sales code combination 9-68 was “patently incorrect” because it caused the GSE to treat short sales as a potential foreclosure. However, the Ninth Circuit noted that the credit reporting agency reported short sales with code combination of 9-68. Account status code 68 automatically inserted 9 into the lead payment history spot, signifying that the account was “Settled” and “legally paid in full for less than the full balance.” This, according to the Ninth Circuit, was the very definition of a short sale. Further, the Ninth Circuit explained that even if code combination 9-68 stood for other derogatory events, and thus could be misleading, that alone did not render the credit reporting agency’s reporting actionable. The reporting must be “misleading in such a way and to such an extent that it can be expected to adversely affect credit decisions.” Gorman v. Wolpoff & Abramson, LLP, 584 F.3d 1147, 1163 (9th Cir. 2009). As the Ninth Circuit explained, the credit report agency reported foreclosures with code 8-94, which meant “[c]reditor [g]rantor reclaimed [the] collateral to settle defaulted mortgage.” And, as the Ninth Circuit further explained, a foreclosure did not occur where a mortgage account is “legally paid in full for less than the full balance” like a short sale. Thus, in the Ninth Circuit’s view, the credit reporting agency’s code system accurately distinguished short sales and foreclosures. The plaintiffs also argued that the credit reporting agency’s reports were misleading because it knew the GSE was misreading its technical manuals and failed to take remedial action. However, the Ninth Circuit rejected this argument because FCRA did not make the credit reporting agency liable for the misconduct of its subscribers. Thus, because the Ninth Circuit determined that the plaintiffs failed to point to any inaccuracies on their credit reports, it did not have to consider whether the credit reporting agency had reasonable procedures or conducted reasonable reinvestigations.
Next, the Ninth Circuit turned to the plaintiffs’ arguments regarding the credit reporting agency’s consumer disclosures. As you may recall, 15 USC. § 1681g(a) provides, in relevant part, that “[e]very consumer reporting agency shall, upon request, clearly and accurately disclose to the consumer: [a]ll information in the consumer’s file at the time of the request.” A consumer’s file includes “all information on the consumer that is recorded and retained by a [credit reporting agency] that might be furnished, or has been furnished, in a consumer report on that consumer.” Cortez v. Trans Union, LLC, 617 F.3d 688, 711-12 (3d Cir. 2010). First, the plaintiffs argued that the credit reporting agency’s consumer disclosures violated section 1681g(a)(1), because it placed the designation “CLS” (Closed) in the lead spot on the payment history grid on each consumer disclosure, instead of one of the code 9 statuses. The plaintiffs argued that because the status category on a consumer disclosure (“Paid in settlement”) was a separate category from the lead digit in the payment history grid on a credit report, these categories served different purposes. The Ninth Circuit disagreed. It found that the credit reporting agency complied with section 1681(g) because it provided the plaintiffs with all information in their files at the time of their requests in a form that was both clear and accurate. Specifically, the credit reporting agency’s consumer disclosures conveyed the same information it reported to its subscribers. Additionally, the Ninth Circuit determined that the credit reporting agency was not required to report the actual code 9 in a consumer disclosure. Requiring the credit reporting agency to provide its proprietary code, in the Ninth Circuit’s view, would contradict section 1681g(a)’s requirement that the disclosure be “clear.” In order for a consumer to understand code 9, the credit reporting agency would have to report account status code 68 and release its complicated technical manual, which would further confuse unsophisticated consumers.
Moreover, the Ninth Circuit was unpersuaded by the plaintiffs’ argument that the credit reporting agency violated section 1681g(a)(1), because “there was a material disconnect between the information displayed in [their] consumer reports and the information displayed in [their] consumer disclosures due to the presence of the catchall code 9.” As the Ninth Circuit explained, this was in essence the same argument based on an incomplete interpretation of the credit reporting agency’s coding system. The credit reporting agency’s account status code 68 clarified the account’s status and the specific derogatory event attached to it. Thus, the Ninth Circuit held that the plaintiffs failed to identify what information the credit reporting agency improperly excluded from its disclosures. Additionally, the Ninth Circuit found that the plaintiffs failed to establish a right to statutory damages under 15 USC. § 1681n, which required a showing that the credit reporting agency willfully failed to comply with FCRA. The Ninth Circuit stated that even if the credit reporting agency had violated section 1681g, it did not act in an objectively unreasonable manner by electing not to list code 9 in its consumer reports. Further, the Ninth Circuit noted that the Consumer Financial Protection Bureau investigated the short sale-foreclosure problem and determined that the underlying issue was not due to inaccurate reporting by furnishers or credit reporting agencies. Accordingly, the Ninth Circuit affirmed the trial court’s grant of summary judgment in favor of the credit reporting agency.
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