Ninth Circuit Holds That Mistakenly Sending Notices Of Default And Acceleration To A Borrower Whose Loan Was Modified Constitutes Adverse Action Under ECOA

In Schlegel v. Wells Fargo Bank, NA, 11-16816 (9th Cir. July 3, 2013) the borrowers alleged they entered into a loan modification agreement with the lender that retained the same interest rate but extended the maturity date of the loan. Shortly afterwards, however, the lender mistakenly began sending the borrowers default notices that the loan was in default and if it were not cured the loan would be accelerated. The borrowers contacted the lender who advised them that the notice was a mistake and instructed them to make the payments according to the modification agreement. But the lender continued to send notices and thereafter insisted that there was no loan modification and that the loan was in default. The borrowers sued alleging that the lender violated the FDCPA by using false and unfair to collect the debt. It also alleged the lender discriminated against them under Equal Credit Opportunity Act (ECOA) by accelerating their debt without first providing notice of this adverse action as required by ECOA. The lender moved to dismiss the FDCPA claim because it was not a debt collector under the FDCPA. It also moved to dismiss the ECOA claim arguing that the default notices did not constitute adverse actions because the borrowers were not in default, and the lender was mistaken in saying they were. The notices therefore did not modify the loan modification agreement. The Ninth Circuit affirmed the dismissal of the FDCPA count finding the complaint devoid of any allegation that the lender was a debt collector. It reversed the ruling on the ECOA count, however. It agreed with the borrowers that the lender’s acceleration of the debt constituted a revocation of credit for purposes of the definition of adverse action. The court noted that ECOA does not define revocation but the plain meaning of the term means that a lender revokes credit when it annuls, repeals, rescinds or cancels a right to defer payment of a debt. The court noted that the borrowers made diligent efforts to determine whether the default notices were mere clerical errors or if they actually represented the lender’s termination of the loan modification agreement. Based on the lender’s prolonged non-responsiveness, and its affirmative statements regarding loan acceleration and default, the facts alleged plausibly gave rise to the claim that lender terminated the loan modification agreement and thereby revoked the borrower’s credit for purposes of ECOA. The court rejected the lender’s explanation that the notices had no binding effect and could not possibly be read to mean that it was terminating the agreement (presumably because the lender did not have the right to terminate the agreement). The court observed that neither the text of §1691 nor its implementing regulations suggest that a ‘revocation of credit’ must be valid and enforceable in order to constitute an adverse action. The lender’s statements communicated its refusal to abide by the terms of the loan modification agreement, which, on its face, revoked the prior credit arrangement. The court was careful to say that [w]hile sending a mistaken default notice would not necessarily constitute an adverse action, the [borrowers’] complaint describes egregious conduct that goes far beyond clerical error suggesting that a lender does not violate ECOA for a mere clerical error.

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