Shaw v. Experian Info. Solutions, Inc.

• Decision Date: 29 May 2018
• Docket Number: No. 16-56587,16-56587
• Citation: 891 F.3d 749
• Parties: John T. SHAW, on behalf of himself and all others similarly situated; Kenneth Coke; Raymond Rydman, Plaintiffs-Appellants, v. EXPERIAN INFORMATION SOLUTIONS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

891 F.3d 749

John T. SHAW, on behalf of himself and all others similarly situated; Kenneth Coke; Raymond Rydman, Plaintiffs-Appellants,

v.EXPERIAN INFORMATION SOLUTIONS, INC., Defendant-Appellee.

No. 16-56587

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 10, 2018 Pasadena, California

Filed May 29, 2018

Guerino John Cento (argued), Cento Law LLC, Indianapolis, Indiana; Matthew J. Zevin, Stanley Law Group, San Diego, California; for Plaintiffs-Appellants.

Adam Wiers (argued), Jones Day, Chicago, Illinois; Kelly V. O'Donnell, Jones Day, San Diego, California; for Defendant-Appellee.

Before: MARY M. SCHROEDER and MILAN D. SMITH, JR., Circuit Judges, and GERSHWIN A. DRAIN,^* District Judge.

OPINION

M. SMITH, Circuit Judge:

Plaintiffs-Appellants John Shaw, Kenneth Coke, and Raymond Rydman (collectively, Appellants) brought this action against Defendant-Appellee Experian Information Solutions, Inc. (Experian), alleging violations of the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681, et seq. Between 2010 and 2011, each Appellant executed a short sale on real property that he owned. Appellants brought this action against Experian because of the manner in which Experian reported those short sales. The district court granted summary judgment in favor of Experian on all claims. We affirm.

First, we hold that Appellants' reasonable procedures and reasonable reinvestigation claims fail because Appellants' credit reports were accurate. Second, Appellants' failure to disclose claim fails because Experian clearly and accurately disclosed to Appellants all information that Experian recorded and retained that might be reflected in a consumer report. Third, Appellants' request for statutory damages under 15 U.S.C. § 1681n fails because they have not shown a willful violation by Experian.

FACTUAL AND PROCEDURAL BACKGROUND

I. Credit Reporting Industry

Experian is a consumer reporting agency (CRA) as defined by the FCRA. 15 U.S.C. § 1681a(f). CRAs receive credit information about borrowers and consumers from data furnishers, such as mortgage lenders and credit card companies. Furnishers generally report their data to CRAs using an agreed-upon format, known as Metro 2. Furnishers' Metro 2 reporting requirements are specified in the Credit Reporting Resource Guide (CRRG), which is published by the Consumer Data Industry Association (CDIA), a CRA trade association.

Once CRAs receive credit information from furnishers, they compile and distribute the information to subscribers through credit reports, and to consumers through consumer disclosures.¹ Even though it receives its data input in the standardized Metro 2 format, each CRA uses its own proprietary coding format to analyze and report credit information to subscribers. Experian provides credit reports to approximately 15,000 subscribers. It delivers its credit reports in a proprietary computer-generated format that displays credit information "in segments and bits and bytes," but Experian provides technical manuals that enable subscribers to read and understand the credit reports they receive. Subscribers cannot read Experian’s reports without these technical manuals.

II. Short Sales

A short sale is a real estate transaction in which the property serving as collateral for a mortgage is sold for less than the outstanding balance on the secured loan, and the mortgage lender agrees to discount the loan balance because of a consumer’s economic distress. A short sale is a derogatory credit event that furnishers report to CRAs in a particular manner. By 2009, the CRRG instructed furnishers to report short sales to CRAs using an Account Status Code of "13 or 61-65, as applicable," a Special Comment of "AU (Account paid in full for less than the full balance)," and a Current Balance and Amount Past Due amount of zero. An Account Status Code of 13 indicates a "[p]aid or closed account/zero balance," while 61 through 65 indicates the account was paid in full and there was a "voluntary surrender," "collection account," "repossession," "charge-off," or "foreclosure ... started."

When Experian receives data reporting a short sale, it must translate the data into its proprietary coding before it can export the data. Experian’s technical manual describes how it codes short sales:

• Account type: A mortgage-related account, such as a first mortgage or home equity line of credit.

• "Account condition" and "payment status" code: 68, which corresponds to a Special Comment of "Acct 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.

• Payment history grid showing the final status ("Settled") in the first digit, followed by 24 months of payment history information.

• Date in 25th month in the payment history grid corresponds to the date the furnisher reported the "Settled" status to Experian.

Thus, in the case of a short sale, the reported account condition code is 68 ("Account legally paid in full for less than the full balance"), which then automatically inserts the number 9 into the payment history grid (to display a "Settled" status).² But a lead payment history code of 9 can represent multiple derogatory, non-foreclosure statuses. These include "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, on the other hand, 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 Experian’s technical manuals, it is impossible for Experian’s credit reports to reflect a foreclosure with a lead payment history code of 9.

Experian prepares consumer disclosures in a more easily read format than the credit reports Experian provides to subscribers. For example, when an account in an Experian credit report contains code combination 9-68, the consumer disclosure lists "CLS" (Closed) in the lead payment history grid position. The disclosure also lists the account’s status as "Paid in Settlement" with a creditor’s statement of "Account legally paid in full for less than full balance."

III. Fannie Mae

Fannie Mae is a government-sponsored entity that purchases loans from certain lenders. The rules governing Fannie Mae’s operations restrict which loans it can purchase, and it partly implements those restrictions through its own proprietary software, called Desktop Underwriter. Fannie Mae also licenses Desktop Underwriter to certain lenders. Importantly for Appellants, consumers with a prior foreclosure must wait seven years before obtaining a new mortgage through Fannie Mae, whereas consumers with a prior short sale need wait only two years.

When a prospective borrower submits a mortgage application to Fannie Mae, Desktop Underwriter analyzes credit report data about the prospective borrower obtained from CRAs. In doing so, Desktop Underwriter relies on Fannie Mae’s manner of payment code (MOP), which corresponds to Experian’s lead payment history code. Until 2013, Desktop Underwriter "identified [mortgage accounts] as a foreclosure if there [was] a current status or [MOP] of ‘8’ (foreclosure) or ‘9’ (collection or charge-off)." In other words, Fannie Mae elected to treat code 9 the same as it treated code 8, even though it knew from the instructions Experian had provided that code 9 did not represent a foreclosure, and that it was "necessarily capturing accounts that [were] not actually foreclosures." Fannie Mae’s treatment of lead payment history codes 8 and 9 caused significant adverse consequences because it led Fannie Mae to impose a seven-year waiting period on consumers with a prior short sale, when the waiting period should only have been two years.

IV. Discovery of the Reporting Error

In 2010, consumers with prior short sales began notifying Experian that lenders had denied them new mortgages because their files erroneously showed prior foreclosures. In 2011 and 2012, various sources informed Experian that Fannie Mae’s Desktop Underwriter software was identifying short sales as foreclosures due to its treatment of Experian’s lead payment history code 9. Experian raised this issue with Fannie Mae, but neither entity changed its coding.

Appellants discovered this error during this same time period. Shaw executed a short sale in March 2010. He later ran his information through Desktop Underwriter, which indicated that he had executed a prior foreclosure. When he applied for a new mortgage, the bank used Freddie Mac’s (which is distinct from Fannie Mae) underwriting software, and it identified a short sale, not a foreclosure. The bank originated this loan because it understood that Shaw had experienced a prior short sale, not a foreclosure.

Coke executed a short sale in 2011. The next year, he obtained a mortgage from a bank that used an underwriting system other than Desktop Underwriter, and that software correctly identified this short sale. In 2013, the bank attempted to underwrite a different mortgage using Desktop Underwriter, which identified a possible foreclosure. Coke eventually received a loan from the bank once it recognized that Experian coded the account as a short sale, but he alleges that the loan had a higher interest rate, and this caused him stress and embarrassment.

Rydman executed a short sale in June 2011. In 2013, he applied for a new mortgage, and when the prospective lender used the Desktop Underwriter software, it identified a possible foreclosure, and his loan application was denied. He applied for another mortgage the following year, and received it because the lender did not use Fannie Mae’s Desktop Underwriter, and did not identify a potential foreclosure in his credit history. He alleges that the delay in obtaining a new mortgage caused him approximately $55,000 in damages.

Between 2012 ...