Appellate Court Holds Secondary Market Mortgage Investor Not Liable Under ECOA for Discriminatory Conduct of Unaffiliated Originator

Courts Lending Discrimination ECOA Regulation B

On February 16, the U.S. Court of Appeals for the Fifth Circuit issued an opinion addressing whether Section 8 mortgage applicants may claim discrimination under the Equal Credit Opportunity Act (ECOA) by both a mortgage originator and a subsequent investor in the secondary mortgage market. See Alexander v. AmeriPro Funding, Inc. No. 15-20710, 2017 WL 650193 (5th Cir. Feb. 16, 2017). At issue before the Appellate Court were claims alleging that both the mortgage originator that interacted with borrowers, made credit decisions, and actually gave mortgages to home buyers, and the investor, engaged in the business of investing in or buying mortgages originated by the mortgage originator, were subject to liability for discriminatory conduct in violation of ECOA based upon plaintiffs’ allegations that “they applied for mortgages through [the mortgage originator] and that [the mortgage originator] did not consider their Section 8 income in processing the application because it intended to sell the mortgages to [the investor].”

Ultimately, the Court denied all but a small subset of the various claims asserted by plaintiffs.  Among other things, the Court held: (i) that the record did not support a claim that the investor—having purchased the mortgages at issue in the secondary market after execution—discriminated against and/or failed to consider Section 8 income in assessing the creditworthiness of any plaintiff; (ii) that plaintiffs’ allegations concerning their application with the mortgage originator could not also be applied to a subsequent secondary mortgage investor such as the investor; and (iii) that the record similarly did not support a finding that  the investor was a “creditor” with respect to the plaintiffs and/or the mortgage agreements entered into with the mortgage originator.

The Appellate Court did, however, side with plaintiffs as to those claims against the mortgage originator that set forth facts plausibly alleging conduct on the part of the mortgage originator that might constitute improper discounting of Section 8 income in assessing their creditworthiness. The Appellate Court reversed the district court’s dismissal as to those claims and remanded for further proceedings.

Notably, the Court expressly disagreed with the CFPB’s argument (as amicus) for a broader definition of “creditor” under ECOA and Regulation B’s definition of the term because it determined that “a potential assignee who establishes underwriting guidelines for its purchases but does not influence individual credit it not a creditor,” and that Regulation B’s definition would not include “those who have no direct involvement whatsoever in an individual credit decision.”