Xu v. Better Mortgage Corporation

Background

Jing Xu sued Better Mortgage Corporation (BMC) and The Money Source (TMS), alleging violations of the Fair Credit Reporting Act (FCRA). Xu alleged that he obtained a loan from BMC in September 2021 and later set up an account with TMS, BMC’s loan servicer, to make payments. He alleged that BMC had told him automatic payments would be turned on unless the loan was transferred, in which case he would receive notice that the automatic payments would stop.

Xu alleged that he learned in January 2022 that derogatory information about him had been reported because of a late payment. He said neither BMC nor TMS had informed him that a second payment due in November 2021 had not been made. He alleged that TMS acknowledged the defendants were at fault but refused to correct the reporting.

Xu’s complaint alleged that the defendants willfully or negligently failed to review relevant credit information, conduct a reasonable investigation after receiving notice of his dispute, and correct inaccurate information provided to credit-reporting agencies.

BMC’s Motion to Dismiss

BMC moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not allege enough facts to state a legally valid claim. BMC argued that Xu did not adequately allege that BMC was a “furnisher” of credit information, did not identify what information BMC allegedly provided or which credit-reporting agency received it, and did not sufficiently allege that the information was inaccurate. BMC also argued that its duties to investigate were not triggered because it had not received notice of Xu’s dispute from a credit-reporting agency.

Xu argued that BMC fit the FCRA’s definition of a furnisher and that incomplete or misleading information could be actionable even if some of the reported information was technically accurate. He also argued that BMC received notice after he contacted credit-reporting agencies.

The court agreed with BMC that Xu had not adequately alleged facts showing that BMC provided derogatory information to a credit-reporting agency. The complaint stated only, in a conclusory way, that the defendants published a derogatory report to applicable agencies. It did not explain what information was conveyed or identify the agencies involved. The court also found that Xu had not sufficiently alleged that a credit-reporting agency notified BMC about the dispute. The complaint did not clearly state whether BMC received notice from an agency or directly from Xu.

The court therefore granted BMC’s motion to dismiss with leave to amend. The court stated that Xu could amend his pleadings within 21 days to provide the required factual allegations.

Motion for Sanctions

BMC separately sought sanctions under Rule 11, arguing that Xu’s claim was frivolous because he allegedly failed to investigate whether BMC, rather than TMS, had furnished the derogatory information. BMC relied in part on a document indicating that TMS furnished information to TransUnion on February 18, 2022.

Xu argued that BMC had not shown that it did not furnish information to other credit-reporting agencies and that BMC could potentially be responsible for TMS’s conduct as its authorized agent. The court denied BMC’s motion for sanctions. It found no evidence that Xu filed the lawsuit for an improper purpose and concluded that the filing was not frivolous because Xu appeared to believe that further investigation or discovery could provide evidentiary support for his allegation that BMC was a furnisher. The court explained that granting the motion to dismiss for inadequate pleading did not mean sanctions were warranted.

Xu’s Motion to Amend

Xu separately moved for leave to file an amended complaint adding claims for negligent misrepresentation and violation of California’s Unfair Competition Law. The court denied that motion as moot because, in granting BMC’s motion to dismiss, it had already granted Xu leave to amend. The court stated that Xu could include additional claims in his amended complaint, and BMC could later challenge those claims in a responsive pleading.

Disposition

The court granted BMC’s motion to dismiss with leave to amend, denied BMC’s motion for sanctions, and denied as moot Xu’s motion for leave to file an amended complaint. Xu was permitted, but not required, to file an amended pleading within 21 days.