United States District Court, S.D. Indiana, Indianapolis Division
ORDER ON DEFENDANT'S MOTION TO DISMISS
RICHARDX. YOUNG, JUDGE
action Relator Michelle Calderon (“Calderon”)
contends that Defendant Carrington Mortgage Services, LLC
(“Carrington”), committed multiple counts of
fraud under the False Claims Act (“FCA”), 31
U.S.C. §§ 3729 et seq., in connection with
its residential mortgage lending business. (Filing No. 40,
Am. Compl. ¶ 5). The United States of America (the
“Government”), which would be a plaintiff in this
qui tam action, declined to intervene. (Filing No.
10). Pending before the court is Carrington's motion to
dismiss the Amended Complaint pursuant to Rules 9(b) and
12(b)(6) of the Federal Rules of Civil Procedure. (Filing No.
reasons set forth below, Carringtons's motion to dismiss
the Supreme Court's directive in Bell Atlantic Corp.
v. Twombly, 550 U.S. 544 (2007), to survive
Carrington's motion to dismiss pursuant to Rule 12(b)(6),
Calderon must provide the grounds for her entitlement to
relief with more than labels, conclusions or a formulaic
recitation of the elements of a cause of action. See
Id. at 555 (citing Papasan v. Allain, 478 U.S.
265, 286 (1986)). The court assumes that all the allegations
in the Amended Complaint are true, but the “allegations
must be enough to raise a right to relief above the
speculative level.” Id. See also Vesely v.
Armslist, LLC, 762 F.3d 661, 664 (7th Cir. 2014). The
touchstone is whether the Amended Complaint gives Carrington
“fair notice of what the … claim is and the
grounds upon which it rests.” Twombly, 550
U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41,
47 (1957)). Legal conclusions or conclusory allegations are
insufficient to state a claim for relief. See Lodholtz v.
York Risk Servs. Grp., Inc., 778 F.3d 635, 639 (7th Cir.
2015); McCauley v. City of Chicago, 671 F.3d 611,
617 (7th Cir. 2011). The court may also consider documents
attached to or referenced in the Amended Complaint, as well
as take judicial notice of publicly available documents, to
decide the motion. See Williamson v. Curran, 714
F.3d 432, 436 (7th Cir. 2013).
brought under the FCA are subject to the heightened pleading
standard of Rule 9(b) . . . .” United States ex
rel. Hanna v. City of Chicago, 834 F.3d 775, 778-79 (7th
Cir. 2016) (quotations and citations omitted). Rule 9(b)
states: “In alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud
or mistake. Malice, intent, knowledge, and other conditions
of a person's mind may be alleged generally.” To
claim fraud with particularity, Calderon must allege
“the who, what, when, where, and how: the first
paragraph of any newspaper story.” Hanna, 834
F.3d at 779 (quotation and citation omitted). See also
United States ex rel. Presser v. Acacia Mental Health Clinic,
LLC, 836 F.3d 770, 776 (7th Cir. 2016); United
States v. Lockheed-Martin Corp., 328 F.3d 374, 376 (7th
is a California company with its principal place of business
in Santa Ana, California. (Am. Compl. ¶ 11). Carrington
operates various centers that provide mortgage loan
servicing. (Id.). Carrington has been authorized to
approve residential mortgage loans for government insurance
and refinancing by the Federal Housing Administration
(“FHA”) between at least March 2013, and March
2015. (Id. ¶ 6).
is a former employee of Carrington who worked as a mortgage
underwriter in Carrington's Fishers, Indiana, office.
(Id. ¶ 10).
The Federal Endorsement Lender Program
FHA, as part of the Department of Housing and Urban
Development (“HUD”), is the largest insurer of
residential mortgage loans in the world. (Id. ¶
12). Pursuant to the National Housing Act of 1934, HUD offers
various mortgage insurance programs. (Id.). Through
these programs, FHA insures approved lenders against losses
on mortgage loans made to buyers of single-family homes.
(Id.). Under these mortgage insurance programs, if a
homeowner defaults on an FHA insured loan and the mortgage
holder forecloses on the property, HUD will pay the mortgage
holder the balance of the loan and assume ownership and
possession of the property. (Id.). By protecting
mortgage holders against defaults on mortgages, FHA mortgage
insurance encourages lenders to make loans to millions of
creditworthy Americans who might not qualify for loans under
conventional underwriting criteria. (Id.). FHA
mortgage insurance also makes mortgage loans valuable in the
secondary markets because FHA loans are expected to have met
HUD underwriting requirements and because they are secured by
the full faith and credit of the United States.
Direct Endorsement Lender program is one of HUD's
mortgage insurance programs. (Id. ¶ 14). Under
this program, an approved lender is authorized to underwrite
mortgage loans, decide whether the borrower represents an
acceptable credit risk for HUD, and certify loans for FHA
mortgage insurance without prior review or approval of the
loans by the FHA or HUD. (Id.). Direct Endorsement
Lenders are private entities such as banks and mortgage
relies upon the experience and expertise of Direct
Endorsement Lenders in approving loans for FHA insurance.
(Id. ¶ 16). HUD expects Direct Endorsement
Lenders to determine whether borrowers represent an
acceptable credit risk for HUD. (Id.). And, to
qualify for FHA mortgage insurance, a mortgage must meet all
of the applicable HUD underwriting requirements, which relate
to, among other things, the adequacy of the borrower's
income and assets to meet his or her mortgage payments, and
the borrower's credit history. (Id. ¶ 15).
Therefore, Direct Endorsement Lenders are obligated to act
with the utmost good faith, honesty, fairness, undivided
loyalty, and fidelity in their dealings with HUD.
(Id. ¶ 16). The duty of good faith requires all
Direct Endorsement Lenders to make full and fair disclosures
to HUD of all material facts and to take on the affirmative
duty of employing reasonable care to avoid misleading HUD.
specifically, Direct Endorsement Lenders are responsible for
all aspects of the mortgage application, the property
analysis, and the underwriting of a mortgage loan.
(Id. ¶ 17). This requires Direct Endorsement
Lenders to employ underwriters to “evaluate [each]
mortgagor's credit characteristics, [the] adequacy and
stability of [the mortgagor's] income to meet the
periodic payments under the mortgage and all other
obligations, and the adequacy of the mortgagor's
available assets to close the transaction, and render an
underwriting decision in accordance with applicable
regulations, policies and procedures.” (Id.
quoting 24 C.F.R. § 203.S(d)).
also relies on Direct Endorsement Lenders to conduct due
diligence on all loans before approving them for FHA
insurance and has set specific rules for such due diligence.
(Id. ¶¶ 19 & 20). The relevant
regulations on due diligence provide that a Direct
Endorsement Lender must: (1) evaluate each borrower's
ability and willingness to repay the mortgage debt (i.e.,
conduct a credit analysis), to limit the possibility of
default and collection difficulties, 24 C.F.R. §
203.5(d); and (2) examine the property offered as security
for the loan to determine if it provides sufficient
collateral (i.e., conduct an analysis of the specific
property), 24 C.F.R. § 203.5(e)(3). (Id. ¶
19). In doing such analyses, the Direct Endorsement Lender
must “exercise the same level of care which it would
exercise in obtaining and verifying information for a loan in
which the mortgagee would be entirely dependent upon the
property as security to protect its investment.”
(Id. quoting 24 C.F.R. § 230.5(c)). Further,
HUD requires Direct Endorsement Lenders to comply with all
governing HUD Handbooks and Mortgagee Letters, which set
forth the applicable minimum underwriting requirements.
(Id. ¶ 20).
is a Direct Endorsement Lender. (Id. ¶¶ 6,
evaluate and, ultimately, extend loans, Carrington uses
FHA's underwriting software, Technology Open to Approved
Lenders (“TOTAL”) and its own HUD-approved
automated underwriting system (“AUS”).
(Id. ¶¶ 23-24). When using these systems
to underwrite a loan, Carrington enters various credit
variables into the AUS, such as the dollar amount of the
borrower's monthly income and available assets, then uses
TOTAL to evaluate the borrower's overall credit and
assign the loan a rating. (Id. ¶ 24). The
rating indicates the level of underwriting that must be
performed on the loan. (Id.). An
“accept/approve” rating means that the loan may
be underwritten with less stringent documentation
requirements and without an underwriter's evaluation of
the borrower's creditworthiness. (Id. ¶
25). However, if TOTAL assigns a “refer” rating
to the loan, it must be manually underwritten and is subject
to more stringent documentation requirements. (Id.).
Manual underwriting requires Carrington to analyze credit
histories; analyze debt obligations; calculate debt and
income ratios, and compare those ratios to the fixed ratios
set by HUD rules; and consider any compensating factors
permitting deviations from the fixed ratios. (Id.
¶ 26). According to guidance provided to Carrington by
the FHA, it is not permitted to manipulate the information
input into the AUS/TOTAL system, rather, there must be a
factual basis for each variable Carrington enters into the
system. (Id. ¶ 27).
end of this process, regardless of whether the TOTAL rating
is “accept/approve” or “refer, ”
Carrington provides loan-specific certification that the data
used by Carrington had “integrity” and that the
loan is “eligible for HUD mortgage
insurance.” (Id. ¶¶ 31, 36).
According to the regulations, once FHA insures a loan based
on Carrington's recommendation, a Mortgage Insurance
Certificate issues, which creates a “contract of
insurance” between the lender and HUD that incorporates
HUD's regulatory requirements and binds both ...