The U.S. Court of Appeals for the Fifth Circuit recently held that a group of plaintiffs plausibly alleged claims for violations of the federal Equal Credit Opportunity Act (ECOA) by asserting that a mortgage lender refused to consider their Section 8 income in assessing their creditworthiness as mortgage applicants, and that they received mortgage loans on less favorable terms and in lesser amounts than they would have had their Section 8 income been considered.
Additionally, the Fifth Circuit held that ECOA does not encompass mortgage purchasers and investors who do not participate in the extension of mortgage loans, even when they have a policy of refusing to purchase mortgage loans that rely on Section 8 income.
A copy of the opinion is available at: Link to Opinion
Twelve individuals who received Section 8 housing assistance inquired about or applied for mortgage loans. Each sought to use their Section 8 income to make payments toward their desired new home mortgage loans. All twelve of the individuals were allegedly denied a loan, or were extended a mortgage loan on allegedly less favorable terms, due to their Section 8 income.
The twelve individuals consisted of three groups: (1) individuals who applied directly to the mortgage lender ("originator applicants") (2) individuals who applied directly to the mortgage loan investor in its capacity as an originator ("investor applicants") and; (3) individuals who merely inquired about obtaining a mortgage loan ("inquirers")
The twelve individuals filed suit against the mortgage originator and the mortgage investor alleging discrimination in violation of ECOA on the basis of their receipt of public assistance income. The defendants moved to dismiss for failure to state a claim, which the trial granted. The plaintiffs appealed.
As you may recall, the ECOA makes it illegal "for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . because all or part of the applicant s income derives from any public assistance program." 15 U.S.C. § 1691(a)(2).
To state a claim for relief under the ECOA, the plaintiffs must plausibly show that they were discriminated against in violation of the statute. More specifically, the complaint must plausibly allege that (1) each plaintiff was an "applicant"; (2) the defendant was a "creditor"; and (3) the defendant discriminated against the plaintiff with respect to any aspect of a credit transaction on the basis of the plaintiff's membership in a protected class. See 15 U.S.C. §§ 1691(a), 1691a(b), 1691a(e), 1691e(a).
First, the Fifth Circuit addressed the investor applicants. The investor applicants were those that applied for a mortgage loan directly with the mortgage investor defendant in its capacity as a mortgage originator. The investor applicants alleged only that the investor refused to consider their Section 8 income based on their guide. The guide stated that it would not purchase mortgage loans originated by other lenders when based on Section 8 income. The investor applicants alleged this was a violation of the ECOA.
However, the Fifth Circuit noted that the ECOA does not prohibit discrimination with respect to mortgages purchased on the secondary market.
The Court noted that the other allegations asserted by the investor applicants were merely improper formulaic recitations of the elements of a cause of action. Thus, the Fifth Circuit affirmed the trial court's dismissal as to the investor applicants' allegations.
The Fifth Circuit then addressed the inquirers. The inquirers sought information from the originator but never applied for a loan.
Under the ECOA, and "applicant" is defined as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit." 15 U.S.C. § 1691a(b). The Court noted that the common meaning of the word "apply" means "to make an appeal or request especially formally and often in writing and usually for something of benefit to oneself."
Thus, the Fifth Circuit held, the plain language of the ECOA unmistakably provides that a person is an applicant only if he or she requests credit. Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937, 941 (8th Cir. 2014) (citing Webster s Third New International Dictionary 105 (2002)) (alterations omitted), aff'd by an equally divided Court, 136 S. Ct. 1072 (2016).
The Court noted that the inquirers did not allege that they applied for a loan or otherwise requested credit. They only alleged that they contacted the originator as to financing a home. The Fifth Circuit found these allegations insufficient to plausibly show that the inquirers applied for credit.
The inquirers cited case law where the Fifth Circuit reversed a holding that an applicant did not have standing because he failed to complete his application. However, the Court noted that in the instant case, the inquirers never alleged they submitted any sort of application or requested any credit.
The inquirers also argued that they failed to apply because the originator discouraged them from applying. The Court rejected this argument because the ECOA allows only an "aggrieved applicant" to bring a private cause of action, 15 U.S.C. § 1691e, and discouraging a prospective applicant cannot be brought as a violation of the ECOA.
Because the inquirers failed to allege they were applicants under the ECOA, the Fifth Circuit affirmed the trial court's dismissal as to the inquirers.
Third, the Fifth Circuit addressed the originator applicants. Each of the originator applicants filled out a loan application and submitted it to the originator for evaluation.
The applicants allege that they were denied credit and financing because the originator asserted it did not have an investor that would purchase a loan allowed for their Section 8 income to be utilized in calculating the debt to income ration and for qualifying purposes. In addition, one of the originator applicants alleged she was specifically told Section 8 income would not qualify her.
The Fifth Circuit found that these allegations were sufficient to state a claim under ECOA for Section 8 income not properly being considered. Accordingly, the Court reversed the trial court's dismissal as to the originator applicants' claims against the originator.
The originator applicants also alleged ECOA violations against the investor. They allege that the investor's secondary market policy of refusing to purchase mortgages that rely on Section 8 income determined the originator's policy of discriminating against applicants with Section 8 income.
The Fifth Circuit noted that the ECOA defines a "creditor" as "any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit." 15 U.S.C. § 1691a(e).
The Court noted that the originator applicants did not allege that they applied directly or indirectly to the investor. Thus, the Court held that the investor could only be held liable as a creditor to the applicants if it was an "assignee of an original creditor who participates in the decision to extend, renew, or continue credit." 15 U.S.C. § 1691a(e).
The Fifth Circuit found that the originator applicants failed to state a claim against the investor because they did not allege that it participated in the decision to extend credit. The applicants merely alleged that the originator was a seller in the secondary market and the investor was a purchaser. There were no allegations of participation by the investor.
Of note, the Consumer Financial Protection Bureau (CFPB) filed an amicus brief arguing that the definition of creditor includes the conduct of the investor in the secondary market. However, the Fifth Circuit rejected the CFPB's attempted broad expansion of ECOA liability.
In sum, Fifth Circuit held that the investor applicants and inquirers did not state a claim for relief against the originator and/or investor under ECOA, and thus the trial court's dismissal as to those allegations was affirmed. Similarly, the Fifth Circuit held that the originator applicants failed to state a claim for relief against the investor under ECOA, and thus the trial court's dismissal was affirmed as to those allegations as well.
However, the Fifth Circuit held that the originator applicants did state a claim for relief against the originator and the trial court's was reversed as to those allegations.
Ralph T. Wutscher
Maurice Wutscher LLP
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