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From Banking and Finance Law Daily, July 3, 2013

Invalid loan default, acceleration notices were adverse action under ECOA

By Richard A. Roth, J.D.

A creditor that sent mortgage loan borrowers a series of default notices, culminating in a notice that the loan had been accelerated and was due in full, would have taken an adverse action against the consumers, the U.S. Court of Appeals for the Ninth Circuit has determined. The course of conduct would have amounted to a revocation of credit under the Equal Credit Opportunity Act even though the lender and consumers had previously entered into a loan modification agreement that could not be revoked, the court said. However, the court affirmed the dismissal of the consumers’ Fair Debt Collection Practices Act claim after finding that the lender was not properly described as a debt collector (Schlegel v. Wells Fargo Bank, NA, July 3, 2013, Ikuta, Circuit Judge).

According to the consumers’ claims as outlined in the opinion, the consumers took out a mortgage loan in January 2009, then filed a bankruptcy petition only 15 months later. As part of their bankruptcy case, they reaffirmed their loan, indicating an intent to keep their home and repay the loan. The loan and deed of trust were at some point assigned to Wells Fargo, which worked out a loan modification agreement with the consumers that was approved by the bankruptcy court. The opinion did not say the consumers had fallen behind in their payments.

The modification agreement was to take effect on July 1, 2010, and the first payment was due by Aug. 1, 2010. However, Wells Fargo sent the consumers a default notice on July 19, before the due date. The consumers contacted the bank, were told not to worry, and began making their required payments.

A second default notice arrived in November and, when the consumers again contacted Wells Fargo, they were told there was no modification agreement. A third notice arrived a week after the second and, when Wells Fargo failed to correct the problem, the consumers sued. In the eight days following the consumers’ filing, the bank sent two additional notices, the last of which threatened a foreclosure. Only after that did the bank acknowledge that there was, indeed, a loan modification agreement and that the notices were erroneous.

Trial court proceedings. The consumers’ proposed class action asserted that Wells Fargo had violated both the FDCPA and the ECOA. The debt collection claims alleged that the bank had made misrepresentations and used unfair or unconscionable means to collect a debt. The equal credit claim alleged that the bank had taken an adverse action without sending the consumers the mandated adverse action notice. The trial court dismissed both claims.

The problem with the FDCPA claim was that the act applied only to debt collectors, the trial court said, and the consumers had not stated facts showing the bank was a debt collector. The trial court apparently concluded that the default notices and acceleration demand did not constitute an adverse action.

The consumers appealed.

Debt collector status. The FDCPA is intended to protect consumers against abusive tactics by debt collectors, the appellate court began, and applies only to debt collectors. Ordinarily, a creditor collecting its own debt is not considered to be a debt collector. The act provides two criteria for who is a debt collector:

  1. anyone who uses interstate commerce or the mail in any business that has debt collection as its principal purpose; and
  2. anyone who regularly collects or attempts to collect debts owed to someone else.

While the consumers argued that Wells Fargo satisfied both criteria, the court disagreed.

The consumers claimed that Wells Fargo’s business involved debt collection, but they had provided no basis to show that debt collection was the principal purpose of the bank’s business, the court said. “Business” referred to the company, not the company’s business activities, the court added.

The consumers also failed to show that Wells Fargo regularly collected debts owed to someone else, according to the court. Even though the mortgage debt had once been owned by the original lender, it was owned by Wells Fargo at the time of collection, and that was the significant time.

The FDCPA defines not only who is a debt collector but also who is a creditor. The court rejected the bank’s assertion that one who is a creditor never can be a debt collector.

Equal credit opportunity. The purpose of the ECOA is to protect consumers from discrimination in credit decisions. One mechanism the act uses is requiring creditors to give a consumer a statement of the reasons for any adverse action (even if the consumer is not a member of any protected class). A revocation of credit is an adverse action under the act, and the consumers contended that the bank’s notices constituted a revocation of the loan modification agreement.

Wells Fargo, on the other hand, asserted that since the notices could not revoke or alter the terms of the modification agreement, there could not have been an adverse action.

The court rejected the bank’s argument. The ECOA does not require a revocation of credit be valid and enforceable to be an adverse action, the court pointed out. The notices told the consumers that the bank was refusing to honor the modification agreement, and that meant the credit extended by that agreement was being revoked.

Erroneously sending one default notice might not be an adverse action, the court conceded. However, the number of default notices the bank sent, and the bank’s failure to see the error of its ways until a suit was filed, convinced the court that the consumers had described an adverse action requiring the statutorily-mandated notice.

The case is No. 11-16816.

Attorneys: Daniel M. Harris (The Law Offices of Daniel Harris) for John and Carol Robin Schlegel. Jan T. Chilton (Severson & Werson) for Wells Fargo Bank, NA.

Companies: Wells Fargo Bank NA; NTFN, Inc.

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