Monday, January 17, 2011

FYI: 7th Cir Rules in Favor of Investor and Servicer in HOEPA/ECOA/FHA Case, Says Loan Mods Subject to ECOA

The United States Court of Appeals for the Seventh Circuit recently affirmed a lower court's judgment in favor of a mortgage loan investor and loan servicer under state law, the Home Ownership and Equity Protection Act ("HOEPA"), 15 U.S.C. § 1639, Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. § 1691(a)), and Fair Housing Act ("FHA"), 42 U.S.C. § 3604(b).  A copy of the opinion is attached.


In so ruling, the Court held that loan modification offers are subject to ECOA.  "In light of the broad regulatory definitions, we find that [the Borrower], as the recipient of the defendants' offer to modify her loan, "received an extension of credit" and thus became an "applicant" under 12 C.F.R. § 202.2(e).


In 2001, the Plaintiff-Borrower ("Borrower") brought suit against the originating mortgage lender for, among other things, fraud.  The Borrower obtained a judgment against the lender in 2007 which the Borrower was unable to collect.  After 2001, the Borrower's mortgage loan was bought by Defendant Wells Fargo Bank ("Wells Fargo"), and Defendant Litton Loan Servicing ("Litton") took over the servicing of the loan.  However, Wells Fargo did not inform the Borrower prior to 2007 that it was the owner of the loan, and Wells Fargo continued foreclosure proceedings despite being aware of the judgment against the originating lender.  In addition, Litton sent the Borrower a letter proposing a modification of the subject loan in 2007, and also made a payoff demand in that same year. 


In 2007, the Borrower brought this lawsuit against Wells Fargo and Litton, alleging unconscionability and fraud under Illinois state law, violations of HOEPA, and race discrimination under the ECOA and FHA.


The district court dismissed the Borrower's state law, HOEPA and ECOA claims, and granted summary judgment in favor of Wells Fargo and Litton as to the FHA claim.  The Seventh Circuit "agreed with the district court's analysis of all" but the Borrower's FHA claim, but as that error was harmless, the Court affirmed the judgment of the district court entirely.


The Court first held that the lower court properly dismissed the Borrower's state law unconscionability claim on statute of limitations grounds. 


Under Illinois law, claims for unconscionability are subject to a five-year statute of limitations. 735 ILCS 5/13-205.  The Court reasoned that "under Illinois law [unconscionability] requires a showing that either the formation of the contract or a contractual term was improper, and none of the Borrower's allegations falling within the limitations period related to the formation of a contract."  The Borrower argued "that her claim of unconscionability should be extended to the defendants' later attempts to enforce the mortgage contract and should not be limited to the contract's formation."  However, the Court held that the language of relevant Illinois statute "addresses only the facts and evidence that may come to bear on the underlying question of whether a contract or a particular contractual term was unconscionable under Illinois law" and "does not change the underlying question itself."


The Court also affirmed the lower court's dismissal of the Borrower's state law fraud claim.  To prove fraud under Illinois law, the Borrower "must show that the defendant made a knowingly false representation of a material fact" and that the Borrower "reasonably relied on the false representation to her detriment."  On appeal, the Court agreed with the Borrower that the district court erred in not considering the defendants' demands that she pay her loan, which continued even after the defendants knew that the state court had ruled that her loan was based in part on the originating lender's adjudicated fraud.  However, the Borrower "did not allege that she had relied on the defendants' demands for payment or that she had suffered any damages as a result of those demands."


The Court next held that the lower court properly dismissed the Borrower's HOEPA claim because the Borrower's loan closed well outside the "one-year statute of limitations for money damages and a three year statute of limitations for rescission."  See 15 U.S.C. §§ 1635(f), 1640(e).  Relying on Swanson v. Bank of America, N.A., 566 F. Supp. 2d 821 (N.D. Ill. 2008), aff'd, 559 F.3d 653 (7th Cir. 2009), the Borrower argued that the additional allegations against Wells Fargo and Litton effectively extended the statute of limitations under HOEPA.  However, Swanson was a credit card case involving alleged failures to provide proper notices of interest rate increases.  The Borrower's "loan was a closed-end mortgage" and "not an open-ended home-equity loan or revolving credit account," as in Swanson.  In addition, the Borrower did not allege "that the defendants failed to notify her of a change in her loan terms after she signed the closing documents or that there was any change in her loan's terms."


The Court next affirmed the lower court's judgment dismissing the borrower's ECOA claims.  However, the Court held that the lower court erred in finding that the Borrower was not an "applicant" under the ECOA.  The ECOA makes it illegal for creditors to "discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of race." 15 U.S.C. § 1691(a)(1).  The statute defines "applicant" 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).  Regulation B (at 12 C.F.R. § 202.2(e)), which further defines "applicant" under the ECOA as "any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit."  The Court reasoned that, "as the recipient of the defendants' offer to modify the Borrower's loan," the Borrower "'received an extension of credit' and thus became an 'applicant' under 12 C.F.R. § 202.2(e)." 


However, the Court further held that remand of the Borrower's ECOA claim would be fruitless because the Borrower failed to come forward with evidence showing race discrimination.


Similarly, the Borrower "failed to bring forth any admissible evidence of racial discrimination" in support of her FHA claim, and the lower court therefore correctly granted summary judgment to Wells Fargo and Litton on this claim.  In support of her cross-motion for summary judgment on the FHA claim, the Borrower sought to have four affidavits introduced.  However, the lower court struck two of the affidavits because they "failed to comply with the requirements of Rule 56(e) and 28 U.S.C. § 1746," and struck the other two affidavits of former Wells Fargo employees because neither affiant "attested to having any personal knowledge of Mrs. Davis's loan or its surrounding circumstances."  The only evidence of discrimination which remained was the Borrower's "unsubstantiated belief that she was mistreated by the defendants because she was black" which "was insufficient to support her discrimination claims."



Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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Mobile:  (312) 493-0874



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