9th Circuit Reverses Dismissal of FCRA Suit Brought Against Mortgage Servicer in Arizona
The Ninth Circuit recently reversed an Arizona district court’s grant of summary judgment that had dismissed a FCRA lawsuit brought against a mortgage servicer, finding that as a matter of law, the servicer continued to inaccurately report a past due debt that had been legally “abolished” under Arizona’s anti-deficiency statute.
The facts underlying the case go back to 2007, when the plaintiff purchased a single family home via an “80-20” loan, which is a loan product that creates two separate mortgages. Under this arrangement, the first senior mortgage covered 80% of the home’s purchase price ($161,896), and the second junior mortgage covered the remaining 20% ($40,474). Soon after the 80-20 loan was originated in 2007, the servicer-defendant bought and held the junior mortgage. In 2012, after experiencing financial difficulties, the plaintiff-borrower defaulted on both loans. The plaintiff’s home was subsequently foreclosed on and sold at a trustee sale for $161,400, which was enough to cover the senior mortgage, but not the junior mortgage held by the servicer-defendant.
Under Arizona law, any deficiencies that remain after a trustee sale are “abolished” as to the homeowner, meaning the homeowner cannot be personally pursued for any debt that was not covered by the trustee sale. In 2017, several years after the trustee sale, the plaintiff learned that the servicer-defendant was still reporting the junior mortgage as “past due” on his credit reports, which prevented him from obtaining a new mortgage to purchase a home. After written and telephonic communications to the servicer to have continuing “late” and “past due” reports removed from his credit reports were unsuccessful, the Plaintiff filed suit under FCRA, 15 U.S.C. § 1681.
The plaintiff alleged the servicer violated FCRA by failing to reasonably investigate his dispute and by providing inaccurate information to the three credit reporting agencies. Under FCRA, a consumer that finds inaccurate information on their credit report may file a dispute with the reporting agency, which in turn notifies the entity that “furnished” the information about the consumer’s debt. The entity that furnished the information (in this case, the servicer-defendant) must correct or delete inaccurate information after conducting an “investigation with respect to the disputed information.” 15 U.S.C. § 1681s-2(b). As explained by the Ninth Circuit, the investigation must be at least “reasonable” and “non-cursory.”
After examining Arizona’s anti-deficiency statute, Ariz. Rev. Stat. § 33-814(G), the Ninth Circuit found the servicer-defendant’s continued reports of a “late” and “past due” debt were false as a matter of law. The panel explained that the underlying purpose of Arizona’s anti-deficiency statute was to protect homeowners from the “financial disaster of losing their homes to foreclosure” and then being held personally liable for outstanding mortgage deficiencies after the trustee sale. (quoting Baker v. Gardner, 770 P.2d 766, 769 (Ariz. 1988)). Because the trustee sale “abolished” the junior mortgage under Arizona law, it was “patently incorrect” for the servicer to continue to report the existence of a debt. In reversing the district court’s original grant of summary judgment to the servicer-defendant, the Ninth Circuit explained that it was a question for the jury as to whether the servicer’s investigation was “reasonable” for purposes of FCRA.
Finally, while pending, the appeal caught the attention of the CFPB, which filed an amicus brief on behalf of the individual plaintiff. The brief, which was not expressly discussed or cited in the Ninth Circuit’s opinion, argued that FCRA does not exempt “legal disputes” from its requirement that furnishers of information to consumer reporting agencies must reasonably investigate disputes about information they furnished.
