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McCalmont v. Federal National Mortgage Association

United States District Court, D. Arizona

July 21, 2014

JAMES and KATHLEEN McCALMONT, Plaintiffs,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION, et al., Defendants.

ORDER

RUSSEL HOLLAND, District Judge.

Motions to Dismiss

Defendants move[1] to dismiss plaintiffs' complaint. Plaintiffs oppose the Federal National Mortgage Association's motion to dismiss[2] but do not oppose the Federal Housing Finance Agency's motion to dismiss, although they request that the dismissal be with conditions.[3] Oral argument was requested and has been heard on the Federal National Mortgage Association's motion to dismiss.

Background

Plaintiffs are James and Katherine McCalmont. Defendants are the Federal National Mortgage Association (Fannie Mae) and the Federal Housing Finance Agency (FHFA), as the conservator of Fannie Mae.[4]

Fannie Mae is a government-sponsored enterprise which was created, in part, "to establish secondary market facilities for residential mortgages[.]" 12 U.S.C. ยง 1716. Fannie Mae operates exclusively in the secondary mortgage market and does not originate loans. "[M]any mortgage lenders in the United States sell their loans to Fannie Mae."[5] "Fannie Mae purchases what are known as conventional conforming loans. These are loans that are not insured or guaranteed by the federal government, are less than $417, 000, and have certain prescribed risks characteristics."[6] "Fannie Mae buys these conventional conforming loans and either bundles them as securities and sells them to investors or holds the loans in its own portfolios."[7] Fannie Mae only buys loans that meet its eligibility criteria which are outlined in its Selling Guide.[8]

Fannie Mae "leases or licenses" the Desktop Underwriter (DU) automated underwriting system to lenders and mortgage loan brokers, [9] which Fannie Mae contends allows lenders to determine if a prospective loan will be eligible for sale to Fannie Mae. As explained by counsel at oral argument, the lender obtains an applicant's tri-merge consumer report from the three major credit reporting agencies, Equifax, Trans Union and Experian. This information, along with other information provided by the applicant, is entered into the DU system by the lender. The "DU system [then] assembles[, ] reviews, assesses and evaluates all of the information it obtains from the lender and/or broker, and the consumer reporting agencies and/or resellers, including the consumer reports, [10] and generates its own report, known most frequently as the Desktop Underwriting Findings report...."[11] "The DU Findings Report is a detailed report documenting, among other things, the applicant's credit history, credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, mode of living, assets, income, debt-to-income ratio, and employment."[12] The DU Findings Report also indicates whether the applicant would be eligible to have his loan purchased by Fannie Mae and includes "Fannie Mae's recommendation as to whether the lender should grant or originate the loan, deny the loan or approve it subject to certain conditions being satisfied."[13] If the recommendation is "refer with caution", [14] the "loan casefile... may be manually underwritten in accordance with the Fannie Mae Selling Guide."[15]

In October 2009, plaintiffs short sold their home.[16] Plaintiffs allege that "[p]ursuant to Fannie Mae's published Desktop Underwriter Guidelines..., [they] would not be able to qualify for conventional financing for a minimum of two (2) years following this short sale."[17]

Approximately two years after the short sale, in November 2011, plaintiffs attempted to obtain a mortgage from Pinnacle Lending but were "told... that they would not be approved for financing because their own previous short sale was flagged as a foreclosure' which, per DU Guidelines, would prevent [p]laintiffs from obtaining financing for seven (7) years."[18] Plaintiffs allege that "Pinnacle Lending obtained and relied upon a DU Finding Report it purchased from Defendant Fannie Mae... which... falsely stated that [p]laintiffs[]... mortgage loans were coded as a foreclosure instead of a short sale."[19] Plaintiffs allege, however, that they were not aware at the time that the DU Finding Report falsely coded their short sale as a foreclosure.[20]

In January 2012, plaintiffs again tried to obtain a mortgage. This time, they contacted Amerifirst Financial to attempt to obtain a pre-qualification letter.[21] Plaintiffs obtained a pre-qualification letter on January 31, 2012, but on March 1, 2012, after having had their offer on a home accepted, plaintiffs were told that their loan was denied.[22] Plaintiffs allege, that again, unknown to them, "Amerifirst [had] obtained and relied upon a DU Findings Report it purchased from Defendant Fannie Mae... which... falsely stated that [p]laintiffs'... mortgage loans were coded as a foreclosure instead of a short sale."[23]

Plaintiffs, "[k]nowing that the foreclosure' notation would prevent approval at most lending institutions[, ]" next contacted a private bank, Republic Bank, to explore their financing options.[24] Plaintiffs were able to obtain financing through Republic Bank, but "this financing is significantly more expensive... than the terms of the previous loan on which they were prequalified."[25]

In February 2013, plaintiffs "contacted Homeowners Financial Group in hopes of refinancing...."[26] Plaintiffs allege that a false "foreclosure" notation in a DU Findings Report that "Homeowners Financial obtained and relied upon" prevented them from obtaining refinancing.[27] But, plaintiffs allege that they obtained a copy of the DU Findings Report from Homeowners Financial and discovered for the first time that "the proposed loan was not eligible for delivery to Fannie Mae because of a foreclosure[.]"[28] The recommendation in plaintiffs' DU Findings Report was "refer with caution", which means that the "loan casefile is ineligible for delivery as a DU loan...."[29] Plaintiffs allege that "even though DU correctly identified [their] previous short sale acknowledging that so long as that short sale was more than two (2) years ago, DU also manufactured a non-existent foreclosure for [them] and referred, i.e., denied, their application[s] accordingly."[30]

On October 16, 2013, plaintiffs commenced this action in which they allege that Fannie Mae violated the Fair Credit Reporting Act (FCRA) by failing to adopt and follow "reasonable procedures to assure maximum possible accuracy of the information ...


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