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Loan Modifications and the Equal Credit Opportunity Act

Mortgage discrimination is against the law. The federal Equal Credit Opportunity Act (ECOA) makes it illegal for a creditor to discriminate against an applicant on the basis of race, color, religion, national origin, sex, marital status, age, or whether an individual receives public assistance. Notably, if an adverse action is taken against an applicant, even if the applicant is not a member of a protected class listed above, the applicant is entitled to a statement of reasons for the adverse action. In this context, an “adverse action” includes the following: (1) denial or revocation of credit, (2) a change in the terms of an existing credit arrangement, or (3) a refusal to grant credit in substantially the same amount or terms requested. Importantly, a creditor is not required to provide notice of the “adverse action” if the applicant is delinquent or otherwise in default.

A recent decision by the Court of Appeals for the 9th Circuit ruled that a lender who forgot they modified a loan and began foreclosure might be in violation of the Equal Credit Opportunity Act. More specifically, in Schlegel v. Wells Fargo Bank NA, the borrowers took out a $157,000 loan in 2009. The loan, secured by their home, was assigned to Wells Fargo. The borrowers thereafter went into default and filed bankruptcy in 2010.

At that time, Wells Fargo offered to extend the term of the mortgage. The loan modification was then approved by the bankruptcy court and became effective July 1, 2010. Despite all of this, before the first payment was due, and only 10 days after the bankruptcy charge was entered, Wells Fargo sent a default notice threatening to accelerate the full balance of the loan. When the Schlegels received the notice, they contacted the bank, which told them to proceed with the loan modification.

Following this advice, the Schegels began making modified mortgage payments, and yet continued to receive default notices from Wells Fargo. In fact, Wells Fargo eventually notified the Schlegels informing them that foreclosure procedures would be commencing. The court concluded that sending several mistaken default notices constituted a revocation of credit under the ECOA, requiring a statement of reasons for the creditor’s action. At the same time, the court was careful to note that sending a mistaken default notice would not necessarily constitute an adverse action in all cases. In this case, however, the Schlegels’ complaint described conduct that went far beyond a clerical error.

If you suspect discrimination, or your lender failed to provide you with notice of an adverse action, you may be entitled to recover damages. The Bay Area real estate attorneys at Cirrus Law PC represent all parties in commercial and residential real estate transactions and disputes, including owners, buyers and mortgage companies. If you have any questions about the Equal Credit Opportunity Act and the recent court decisions and its potential impact, you can contact one of our lawyers using our online contact form, or by calling us at (925) 463-1073.


Wells Fargo Must Face Foreclosure Suit After Loan Modified, by Karen Gullo, BloombergBusinessweek

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