Daily Development for Friday, March 26, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; EQUAL CREDIT OPPORTUNITY ACT: Even though a borrower never completes a mortgage loan application until closing because the lender does all of the application work, if the borrower's credit inquiry contemplates a smaller loan than that actually made at the closing, the lender has an obligation to notify its borrower of a counteroffer as to the amount of the larger loan actually being made.

Newton v. United Companies Financial Corp., 24 F.Supp.2d 444 (E.D.Pa. 1998).

Four homeowners who entered into high-priced mortgage loans to finance home improvements brought an action against their lender alleging violations of the Truth in Lending Act, Home Ownership and Equity Protection Act, Equal Credit Opportunity Act, and the Real Estate Settlement Procedures Act.

Factually, the Court had no difficulty in determining liability or non- liability under the three acts other than the Equal Credit Opportunity Act ("ECOA").

ECOA requires that within thirty days after receipt of a completed application, a creditor must notify the applicant of its action. If a lender makes a counteroffer to a completed application (such as proposing a higher loan amount), it must give written notice within the same thirty days. In each of the transactions involved, the lender was contacted on the borrower's behalf about the possibility of extending credit in the amount of their home improvement contract, and the lender ultimately extended credit in significantly higher amounts without providing its borrowers with an ECOA counteroffer notice.

In none of the cases did the applicant fill out a written application for credit. Instead, the information was furnished to the lender, who then gathered necessary information to fill out an application. In each case, the application was seen for the first time and signed by each borrower at closing.

The application did not reflect the terms of the credit requested by the borrower, because the lender prepared first mortgage loans to cover the cost of the desired improvements as well as to pay every other item that would be needed in order to put its loan into a first mortgage position.

In an attempt to avoid ever reaching the ECOA trigger of a "completed application," the lender had a regular practice of placing applications in a "pending" file and then acting in a way that was equivalent to denying the application and imposing additional requirements on the applicant, without providing any notification, either of adverse action, or of a change in loan terms, to the applicant. A consumer can make a credit request in the form of an "inquiry," but the inquiry becomes an "application" once the creditor evaluates the information received in the size and the time granting the credit requested.

To the Court, the written or oral request made by the home improvement dealers were de facto "applications" within the meaning of the law and not merely "inquiries" in that: (a) the lender was being asked to extend credit in the specific amount of the home improvement; (b) it regularly evaluated such requests and made decisions once it obtained all the information it needed; and (c) it, in fact, treated the inquiries as requests for credit. While the lender relied heavily on the fact that the ECOA Regulations gave it "wide latitude" in determining its application procedure and what constituted a completed application, the same Regulations state that a lender is bound by the substance of its actual practices, not merely what it chooses to call a completed application. According to the Court, ECOA was designed to give a borrower fair notice of any counteroffer and was specifically designed to prevent bait and switch. Here, the lender created a fiction that it was accepting an offer which the lender itself had created for a larger loan. According to the Court, substance should govern over form, and the lender was found to be in violation of ECOA.

Comment: This is only a federal district court case, so there may be more shoes to drop. But lawyers representing mortgage lenders should recognize that "consumer advocate" trial lawyers, having already become fat on various coordinated class action attacks utilizing federal consumer protection laws, are always on the lookout for new opportunities. Their efforts are well financed through underwriting by "associated" counsel with war chests from other successful recoveries.

It is not unusual for poorly advised "fringe"competitors to undertake practices that skate on the edges of the legal rules, thus challenging more mainstream participants in a consumer market to either follow the practice or lose the business. Attorneys who advise consumer lenders should continuously remind their clients that someone indeed is watching, and waiting, for the most "deep pocket" consumer lenders to take the bait and engage in high risk practices. These class action suits can be brutal in consequence and also can divert the attention of corporate leadership from their real business responsibilities. Stay the course!!

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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