Fifth Circuit holds that a lender’s secondary market policy of not buying loans which rely on Section 8 income will not support a claim under ECOA

In Alexander v. AmeriPro Funding, Inc., 848 F.3d 698 (5th Cir. Feb. 16, 2017) the Fifth Circuit held that a lender is not guilty of violating the Equal Credit Opportunity Act (ECOA) because of an alleged policy not to buy loans in the secondary market that rely on a borrower’s Section 8 income. ECOA applies only to “applicants” who were discriminated against by a “creditor”.

In Alexander, mortgage applicants and prospective applicants brought an action against mortgage originators for violations of ECOA alleging that they discriminated when the originators refused to consider Section 8 income in assessing creditworthiness in evaluating their mortgage applications.

The defendants fell into four separate “groups.” The first “group” included persons who applied directly for a loan with Wells Fargo. The second group consisted of those who sought information from AmeriPro, a loan originator, but who did not actually apply for a loan. The third group were those persons who applied for loans directly with AmeriPro. The last group were those alleging they applied for loans with Ameripro but directed their claims against Wells Fargo because Wells Fargo had a secondary-market policy of refusing to purchase mortgages that rely on Section 8 income that policy determined AmeriPro’s primary-market policy of discriminating against applicants with Section 8 income, Wells Fargo should thus be liable for violating the ECOA.

The claims by the group who applied directly for a loan with Wells Fargo were dismissed because, although the claimants were “applicants” and Wells Fargo was a “creditor”, the only fact alleged to establish that Wells Fargo illegally refused to consider their Section 8 income is its guide stating that it would not purchase mortgages originated by other lenders that rely on Section 8 income. The court held that the question of Wells Fargo’s purchasing on the secondary mortgage market is distinct from its practices as an originating lender. The ECOA does not prohibit discrimination with respect to mortgages purchased on the secondary market; the Act only applies to originating lenders in the primary market.

The court also dismissed the claims against the AmeriPro Inquirers, who sought information from AmeriPro but did not apply for a loan. Dismissal was warranted because ECOA provides relief only to “applicants” and “applicants” are defined as those persons who actually apply for credit. Contacting and making inquiry is not “applying” for a loan.

The court next considered the claims of the four AmeriPro Applicants, who applied for loans with AmeriPro. It concluded that these claims were sufficiently pled because they allege that the “applied” for a loan and were “denied credit and financing” because AmeriPro “claims it did not have an investor that would purchase a loan that allowed for their Section 8 income to be utilized in calculating the debt to income ratio and for qualifying purposes.” The dismissal of the claims of this group was reversed.

Finally, the court addressed and dismissed the claims of the persons who applied for a loan with Ameripro but whose claims were directed against Wells Fargo. Dismissal was upheld because Wells Fargo was not a “creditor” and the plaintiffs were not “applicants” in these transactions. The allegations were centered on Wells Fargo’s secondary-market policy of refusing to purchase mortgages which rely on Section 8 income. ECOA does not cover this policy and therefore does not apply.

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