Fifth Circuit Court of Appeals Rejects Expansion of ECOA Liability to Secondary Market

The United States Court of Appeals for the Fifth Circuit recently declined to extend liability under the Equal Credit Opportunity Act (ECOA) to a correspondent lender that refused to purchase residential mortgage loans in which a portion of the applicant’s income was derived from public assistance.

ECOA makes it unlawful “for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction. . . because all or part of the applicant’s income derives from any public assistance program.” 15 U.S.C. § 1691(a)(2). Twelve plaintiffs, who were receiving public assistance through Section 8 housing vouchers, wanted to apply for loans to purchase homes. They all sought to use the public assistance as income towards qualifying for their desired mortgages.

The plaintiffs brought suit against two entities: a loan originator and a correspondent lender. They stated that the correspondent lender purchased loans on the secondary market, specifically from the defendant loan originator. The plaintiffs alleged that the correspondent lender had publicly available policies stating that it would not purchase mortgages based on Section 8 income. They further alleged that the loan originator unlawfully refused to consider the Section 8 income in order to sell the loans to the correspondent lender.

One category of plaintiffs alleged that they applied for their loans directly to the loan originator, and brought claims against both the loan originator and the correspondent lender. Another category of plaintiffs applied directly to the correspondent lender. The remaining plaintiffs sought information from the loan originator but were turned away because they sought to use public assistance as part of their income on their applications. The district court dismissed all of their claims, and the plaintiffs appealed.

The Fifth Circuit upheld the dismissal, except as to the claims brought against the loan originator by the plaintiffs that had applied directly to the loan originator. The Fifth Circuit explained that for liability under ECOA, the complaint must plausibly allege that the plaintiff was an “applicant,” the defendant was a “creditor,” and the defendant discriminated against the plaintiff as a member of a protected class.

With respect to the claims against the correspondent lender for direct applications to it, the plaintiffs’ only allegation was that the correspondent lender’s policy was not to purchase loans that had been originated based on the applicants’ Section 8 income. The plaintiffs did not allege that the correspondent lender based its origination decisions on the applicants’ Section 8 income. This was not sufficient for liability, because ECOA does not prohibit discrimination with respect to mortgages purchased on the secondary market. Thus, there was no plausible relation between the facts alleged and the plaintiffs’ alleged injuries.

In addition, the plaintiffs who merely inquired about loans and were turned away by the loan originator were not protected by ECOA. ECOA only protects loan applicants from discrimination, and the definition of an applicant is clear. ECOA only considers someone to be an applicant if that person requests credit by making a formal request, usually in writing. These plaintiffs only alleged that they contacted the loan originator and made inquiries about buying homes. They did not allege that they actually applied for the loans. Therefore, their claims were properly dismissed as well.

The Court of Appeals overturned the dismissal of the plaintiffs that applied directly to the loan originator, who declined their applications because the correspondent lender would not purchase loans based on public assistance income. The allegations showed the elements of an ECOA violation: the plaintiffs applied, and the loan originator refused to consider the public assistance as part of their income. As a result, they did not receive mortgages or received them on less favorable terms. They had therefore stated a claim for relief.

However, the Fifth Circuit found that the correspondent lender was not liable for the loan originator’s decision not to consider Section 8 assistance as income, even though that decision was based upon the correspondent lender’s policy not to purchase such loans. The correspondent lender was not a “creditor” under ECOA because it did not participate in the direct decision to extend credit or negotiate terms. Therefore, its policy not to purchase loans that considered public assistance income was not prohibited under ECOA.

The case is Alexander v. AmeriPro and Wells Fargo, and the Fifth Circuit opinion is available here: http://www.ca5.uscourts.gov/opinions/pub/15/15-20710-CV0.pdf.