In a class action suit, Banneck v. Federal National Mortgage Association, U.S. District Court, California Northern District, No. 17-cv-4657, 2018 WL 2287656, the plaintiffs accused Fannie Mae of violating the Fair Credit Reporting Act (FCRA), as well as California law, by reporting completed short sales as foreclosures to potential lenders. As a result of the inaccurate reporting, the plaintiffs received denials when they applied for new loans.
On February 26, 2019, the judge in the case ruled that Fannie Mae can’t be held liable for violating federal or California credit reporting laws for its alleged misreporting because Fannie isn’t a consumer reporting agency subject to those laws.
To fully understand the issues at hand in Banneck, you need to understand the basics about the Fair Credit Reporting Act, what happens if you submit an application for a conventional mortgage, and how long you have to wait before getting a conventional mortgage following a foreclosure or short sale.
The FCRA governs the actions of consumer reporting agencies (CRAs) and the businesses or individuals that report information to those agencies. (To find out more about the FCRA, see Your Rights Under the Fair Credit Reporting Act.)
Fannie Mae is a government-sponsored enterprise that purchases mortgage loans from lenders on the secondary mortgage market. It purchases loans that are known as “conventional conforming” loans. This kind of loan has to be less than a specific amount ($484,350 as of 2019) and must have specific risk characteristics. Fannie Mae then bundles the loans into securities or retains them in its own portfolios. (To learn more about Fannie Mae and how it works, see Who—or What—Is Fannie Mae?)
Lenders that contract with Fannie Mae have to lease or license its system called "Desktop Underwriter" (DU System) and use this system when handling mortgage applications. The DU System aggregates information from the loan application and credit information from consumer credit reporting agencies. Then, the DU System generates a “Desktop Underwriting Findings Report” (DU Findings Report). The DU Findings Report contains information about, among other things, the applicant’s credit history, creditworthiness, credit standing, and credit capacity.
The DU Findings Report also shows whether the applicant has gone through a foreclosure or completed a short sale (or deed in lieu of foreclosure). It also includes a conclusion about whether the applicant’s loan is eligible for Fannie Mae to buy. Finally, the report makes a recommendation about whether the lender should grant, deny, or approve the loan subject to certain conditions.
Under Fannie Mae guidelines, you have to wait a specific amount of time—and show that you’ve re-established good credit—before you can get another conventional mortgage loan following a foreclosure or short sale (or deed in lieu of foreclosure).
Waiting period after a foreclosure. The waiting period for getting a new loan is seven years after a foreclosure. However, if the foreclosure was due to “extenuating circumstances”—like getting laid off from a job, divorce, or substantial medical bills—and you can document the event and the impact on your finances, the waiting period is three years.
Waiting period after a short sale or deed in lieu of foreclosure. The waiting period for a new loan after a short sale is four years, or two years if you had extenuating circumstances. The same waiting periods applies to deeds in lieu of foreclosure.
So, if you wait for seven or four years after a foreclosure—or two or four years after a short sale (or deed in lieu of foreclosure)—and meet other underwriting criteria, you can then qualify for a new mortgage. (Learn more about when you can get a new mortgage after a short sale.)
In the case of Banneck v. Federal National Mortgage Association, the plaintiffs alleged that Fannie Mae violated the FCRA, along with the California Consumer Credit Reporting Agencies Act, by failing to assure the accuracy of its DU Findings Reports provided to lenders.
The plaintiffs contended that because Fannie Mae reported their short sales as foreclosures to potential lenders due to a glitch in the DU System, the plaintiffs were wrongfully denied conventional mortgage financing. (The lenders mistakenly used the standard that required seven years to pass after a foreclosure, rather than the shorter waiting period after a short sale, and therefore denied the plaintiffs' applications for new loans.)
Fannie Mae responded to the suit by arguing that it doesn’t qualify as a CRA and DU Findings Reports are not consumer reports, so it isn’t subject to the FCRA.
In a similar case, Zabriskie v. Fed. Nat'l Mortg. Ass'n, 912 F.3d 1192, 1195 (9th Cir. 2019), the Ninth Circuit decided the dispositive issue in this case and determined that Fannie Mae is not a CRA under the FCRA. Based on Zabriskie, the court in Banneck also decided that Fannie Mae is, indeed, not a CRA and granted Fannie Mae's motion for summary judgment.
Fannie Mae has supposedly corrected the glitch in the DU System so that it no longer reports short sales as foreclosures to lenders who are considering loaning money to a consumer. But if you’ve already had a short sale misidentified by a DU Findings Report as a foreclosure, and that inaccurate information prevented you from obtaining conventional financing or refinancing, consider talking to an attorney to get information about what you should do in your particular circumstances.
Effective date: February 26, 2019