McCalmont et al v. Federal National Mortgage Association et al

Filing 38

ORDER that Defendants' 14 , 23 Motions to Dismiss are granted. The Clerk of Court shall enter judgment dismissing Plaintiffs' complaint with prejudice. Signed by Judge H Russel Holland on 7/21/2014.(LFIG)

WO

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA

JAMES and KATHLEEN McCALMONT,

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Plaintiffs,
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vs.
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FEDERAL NATIONAL MORTGAGE
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ASSOCIATION, et al.,
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Defendants.
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__________________________________________)

No. 2:13-cv-2107-HRH

ORDER
Motions to Dismiss
Defendants move1 to dismiss plaintiffs’ complaint. Plaintiffs oppose the Federal
National Mortgage Association’s motion to dismiss2 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.

1

Docket Nos. 14 & 23.

2

Docket No. 25.

3

Docket No. 26.
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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. § 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

4

Complaint at 2, ¶ 1, Docket No. 1.

5

Id. at 5, ¶ 13.

6

Id. at ¶ 15.

7

Id. at ¶ 16.

8

Id. at ¶ 15.
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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-

9

Id. at 6, ¶¶ 18-19.

10

Lenders which license the DU system are required to “maintain a separate
agreement with any ‘consumer reporting agency’ ... from which it orders ‘consumer
reports’[.]” Desktop Underwriter Schedule at 4, ¶ 11, Exhibit 1, Federal National Mortgage
Association’s Motion to Dismiss, Docket No. 14.
11

Complaint at 6-7, ¶ 22, Docket No. 1.
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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

12

Id. at 7, ¶ 23.

13

Id.

14

A “refer with caution” may mean the applicant has a foreclosure or short-sale in
his history, which, at the time in question, the DU System coded the same.
15

DU Underwriting Findings at 1, Exhibit 1, Complaint, Docket No. 1.

16

Complaint at 9, ¶ 34, Docket No. 1.

17

Id. at ¶ 35.
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‘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

18

Id. at 10, ¶ 39.

19

Id. at ¶ 40. Plaintiffs’ tri-merge report reflected a short-sale, not a foreclosure.
Exhibit 2, Complaint, Docket No. 1.
20

Complaint at 10, ¶ 39, Docket No. 1.

21

Id. at 11, ¶ 44.

22

Id. at ¶¶ 45-47.

23

Id. at ¶ 49.
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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

24

Id. at 13, ¶¶ 55.

25

Id. at ¶ 57.

26

Id. at 14, ¶ 62.

27

Id. at ¶¶ 63-65.

28

Id. at 15, ¶ 69.

29

DU Underwriting Findings at 1, Exhibit 1, Complaint, Docket No. 1.
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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
concerning the individual about whom [a credit] report relates.’”31
Pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, defendants now move
to dismiss plaintiffs’ complaint.
Discussion
“Rule 12(b)(6) authorizes courts to dismiss a complaint for ‘failure to state a claim
upon which relief can be granted.’” In re Rigel Pharmaceuticals, Inc. Securities Litig., 697
F.3d 869, 875 (9th Cir. 2012) (quoting Fed. R. Civ. P. 12(b)(6)). “To avoid dismissal, the
complaint must provide ‘more than labels and conclusions, and a formulaic recitation of
the elements of a cause of action will not do.’” Id. (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007)). “[A] plaintiff must ‘allege sufficient factual matter ... to state a claim
to relief that is plausible on its face.’” OSU Student Alliance v. Ray, 699 F.3d 1053, 1061 (9th
Cir. 2012) (quoting Pinnacle Armor, Inc. v. United States, 648 F.3d 708, 721 (9th Cir. 2011)).

30

Complaint at 19, ¶ 82, Docket No. 1.

31

Id. at 21, ¶ 92 (quoting 15 U.S.C. § 1681e(b)).
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“In evaluating a Rule 12(b)(6) motion, the court accepts the complaint’s well-pleaded
factual allegations as true and draws all reasonable inferences in the light most favorable
to the plaintiff.” Adams v. U.S. Forest Srvc., 671 F.3d 1138, 1142-43 (9th Cir. 2012).
Fannie Mae’s motion to dismiss
“‘Congress enacted the FCRA in 1970 to promote efficiency in the Nation’s banking
system and to protect consumer privacy.’” Pintos v. Pacific Creditors Ass’n, 605 F.3d 665,
674 (9th Cir. 2010) (quoting TRW Inc. v. Andrews, 534 U.S. 19, 23 (2001)). “The legislative
history of the FCRA reveals that it was crafted to protect consumers from the transmission
of inaccurate information about them and to establish credit reporting practices that utilize
accurate, relevant, and current information in a confidential and responsible manner.”
Guimond v. Trans Union Credit Information Co., 45 F.3d 1329, 1333 (9th Cir. 1995) (internal
citations omitted). Section 1681e(b) of the FCRA provides:
Whenever 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 U.S.C. § 1681e(b). “In order to make out a prima facie violation under § 1681e(b), a
consumer must present evidence tending to show that a [consumer] reporting agency
prepared a report containing inaccurate information.” Guimond, 45 F.3d at 1333.
Fannie Mae argues that plaintiffs have failed to state a plausible claim under §
1681e(b) because it is not a consumer reporting agency.
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The term “consumer reporting agency” means any person
which, for monetary fees, dues, or on a cooperative nonprofit
basis, regularly engages in whole or in part in the practice of
assembling or evaluating consumer credit information or other
information on consumers for the purpose of furnishing
consumer reports to third parties, and which uses any means
or facility of interstate commerce for the purpose of preparing
or furnishing consumer reports.
15 U.S.C. § 1681a(f).
Thus, an entity can be deemed a consumer reporting agency if
four factors are satisfied: (1) it acts in exchange for compensation of the kind described; (2) it “regularly” “assembles” or
“evaluates” information on consumers; (3) its purpose in doing
so is to furnish consumer reports; and (4) it utilizes interstate
commerce in the preparation or furnishing of a consumer
report.
Lewis v. Ohio Professional Electronic Network LLC, 190 F. Supp. 2d 1049, 1056 (S.D. Ohio
2002) (quoting 15 U.S.C. § 1681a(f)).
The parties’ arguments focus on the second factor, whether Fannie Mae regularly
assembles or evaluates information on consumers. Plaintiffs argue that they have alleged
facts sufficient to show that it is plausible that Fannie Mae regularly assembles and
evaluates consumer information. Plaintiffs contend that this is exactly what they have
alleged the DU system does, that they have alleged that the DU system assembles and
evaluates consumer information in order to provide a preliminary assessment of whether

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a loan would meet Fannie Mae’s eligibility requirements for purchase.32 In short, plaintiffs
are arguing that because Fannie Mae’s DU system assembles and evaluates consumer
information, Fannie Mae is assembling and evaluating consumer information. Plaintiffs
cite to Zabriskie v. Federal National Mortgage Association, Case No. 13-02260-PHX-SRB,
slip. op, (D. Ariz. April 17, 2014), in support of their argument. There, on a motion to
dismiss a complaint that is factually similar to plaintiffs’ complaint, the court held that
“Fannie Mae acts as a ‘consumer reporting agency’ as the term is defined in the [FRCA]
when it licenses its Desktop Underwriter Software.” Id. at 7-8. This holding was based,
in part, on the court’s finding that Fannie Mae’s “software ‘assembles’ and ‘evaluates’
consumer credit information by compiling (i. e., assembling) an individual’s credit scores
and other information relevant to making lending decisions (such as whether the
individual has gone through foreclosure).” Id. at 7.
This court respectfully disagrees with the result reached by the court in Zabriskie.
It is lenders which obtain an applicant’s credit reports from credit reporting agencies and
it is the lenders which input information about the applicant into the DU system, which
then analyzes the information. It is not Fannie Mae that is assembling and evaluating the
applicant’s information. Rather, it is the software that Fannie Mae has licensed or leased
to the lender which is assembles or analyzes the applicant’s information. Fannie Mae

32

Complaint at 6-7, ¶ 22, Docket No. 1.
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merely provides access to the DU system to assist the lenders with purchase eligibility
guidance. The FTC has taken the position that “[a] seller of software to a company that
uses the software product to process credit report information is not a CRA because it is
not ‘assembling or evaluating’ any information.”33 Because Fannie Mae is not actively
involved in the compilation of the consumer information, it is not regularly assembling and
evaluating consumer information and thus it cannot be a “consumer reporting agency.”34
See Thomas v. Cendant Mortg., Case No. Civ.A. 03–167, 2004 WL 2600772, at *4 (E.D. Pa.
Nov. 15, 2004) (holding that Freddie Mac and Fannie Mae were not “consumer reporting
agencies” because “[t]heir automated underwriting tools review information assembled by
a lender from the credit application, credit report, and other consumer reports and provide
the lender with a preliminary assessment of whether the loan would meet the eligibility
criteria for purchase by Freddie Mac or Fannie Mae”); Barnes v. DiTech.Com, Case No.
03-CV-6471, 2005 WL 913090, at *4-5 (E.D. Pa. April 19, 2005) (noting that, in connection

33

40 Years of Experience with the Fair Credit Reporting Act: An FTC Staff Report
With Summary of Interpretations at 29, (July 2011); see also, October 27, 1997 Informal
Opinion Letter: Cast (opining that a software provider of a program that merged
information from different sources into a final credit report would not be a “consumer
reporting agency” because the software provider is not assembling the information. “The
software ... could be said to assemble and evaluate the information, but the software
provider no longer has any connection at all to the information.”).
34

Because Fannie Mae does not regularly assemble or evaluate consumer
information, the court need not consider whether Fannie Mae meets the other three factors
necessary to make it a consumer reporting agency.

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with a DU Findings Report, “Fannie Mae did not collect and evaluate [Barnes’] credit
information, nor did it direct or recommend whether [DiTech] should approve [Barnes’]
loan application. In fact, Fannie Mae did not engage in any affirmative action on [Barnes’]
application for credit.”).
Fannie Mae also argues that it is not a “consumer reporting agency” because it is
acting as a limited agent for the lenders that use the DU system. However, as plaintiffs are
quick to point out, there are no allegations in their complaint that would suggest that
Fannie Mae is a joint user. Rather, plaintiffs have alleged that Fannie Mae functions
independently of its subscribing lenders and that it is licensing or leasing its DU system to
lenders for a fee. But, as discussed above, because Fannie Mae is not regularly assembling
and evaluating consumer information, it is not a consumer reporting agency.
FHFA’s motion to dismiss
Defendant FHFA moves to dismiss plaintiff’s claims against it because plaintiffs
have not alleged how the fact of FHFA’s conservatorship of Fannie Mae makes it liable
under the FCRA. Plaintiffs do not oppose FHFA’s dismissal but request that this dismissal
be with the condition that FHFA cannot later move to intervene or otherwise participate
in this litigation. As FHFA is quick to point out however, such an order would be, in effect,
an injunction against FHFA from taking action in this lawsuit, if FHFA at some later point,
determined such action was necessary. Such an injunction is not permissible under federal

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law. See 12 U.S.C. § 4617(f) (“Except as provided in this section or at the request of the
Director, no court may take any action to restrain or affect the exercise of powers or
functions of the Agency as a conservator or a receiver.”); see also, Zabriskie, Case No. 13cv-2260-PHX-SRB, slip op. at 8-9.
Conclusion
Based on the foregoing, defendants’ motions to dismiss35 are granted. The clerk of
court shall enter judgment dismissing plaintiffs’ complaint with prejudice.
DATED at Anchorage, Alaska, this 21st day of July, 2014.
/s/ H. Russel Holland
United States District Judge

35

Docket Nos. 14 & 23.
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