Privacy Rights Remain an Issue in California.

A recent court decision in California has left mortgage servicers scrambling to understand the state's financial information privacy act, according to attorneys who spoke at the Western States Loan Servicing Conference here.

On July 30, the United States District Court for the Eastern District of California ruled that the national Fair Credit Reporting Act and the FACT Act do not pre-empt California's own privacy act, known as SB-1, which became effective on July 1.

Joseph Lynyak, an attorney with ReedSmith in Los Angeles, said the plaintiffs have said they will appeal the decision, but they have elected not to request an injunction against enforcement of the requirements of the California law while the appeal is in motion.

In a report about the court case, Mr. Lynyak and his colleagues at ReedSmith said the court decision caught financial intermediaries off guard, many of whom believed that SB-1 was "clearly pre-empted by the FCRA."

That leaves companies in a quandary, since the California law is more restrictive regarding the transfer of data than the federal law. The court ruled that SB-1 is not a credit reporting statute, but rather a privacy statute, and therefore not pre-empted, Mr. Lynyak said at the conference.

When working with third parties, lenders will have to ensure that contractual arrangements protect data, and they will probably face a higher due diligence burden with regard to data management, he said.

"What you also have to do as a loan servicer is think about, 'Do I really own this data?'" he said during the servicing conference, which was hosted by the California Mortgage Bankers Association.