‘No good deed goes unpunished,’ it is said.
How about when a lender encourages traditionally disadvantaged
groups to apply for credit?
As long as such applicants are
eligible for a certain loan product and all the origination rules and
regulations are followed – and there is no predatory lending or fair lending
violation! – why not encourage them to apply?
It seems fair to conjecture that such
a disadvantaged group could be encouraged to apply for a loan.
Occasionally, a good deed hides in
plain sight!
One regulation that is supposed to
keep everybody honest is Regulation B, the implementing regulation of the Equal
Credit Opportunity Act (ECOA). Regulation B provides[i] that a creditor
“shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”
The comment to this provision states that
“[a] creditor may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor.”
While
Regulation B generally qualifies its prohibition against discouragement with
the words “on a prohibited basis,” many, if not most, lenders require their
employees to encourage inquirers to apply, in part to fulfill the lender’s
standard policies and procedures designed to ensure compliance with ECOA and
other regulatory requirements. These policies and procedures are also designed
to prevent compliance failures by misinformed or rogue employees. In addition,
they provide some assurance that employees will not make premature decisions
based on incomplete information.
Recently, the U.S. Court of Appeals for the 5th Circuit considered a
claim filed by consumers who alleged that their lender’s encouragement of their
application for a modification was “false or deceptive” within the meaning of
the Texas Debt Collection Act (TDCA).[ii]
The
Clarks defaulted on their home mortgage loan. Throughout 2013, they attempted
to negotiate a modification to help remedy the default.
On
December 13, 2013, they received a letter from their loan servicer regarding a
HAMP modification, which stated:
“Now that we’ve received your documents, our loan processing team will carefully review what you’ve submitted to determine if you are eligible… I will follow up with you by Sunday, January 12, 2014, to outline next steps in the process and address any additional documents that might be needed to complete our review….”
The
Clarks immediately sent in the HAMP loan application with the requested
documentation. One week later, they received a letter stating that they had
failed to qualify. The creditors then proceeded with foreclosure
Ah, the unrequited! What are we to do but sue!
As Ulysses opines in Troilus and Cressida:
“Time hath, my lord, a wallet at his back
Wherein he puts alms for oblivion,
A great-sized monster of ingratitudes:
Those scraps are good deeds past, which are devour'd
As fast as they are made, forgot as soon as done.”
The good deed undone, the ineligible
Clarks sued.
The
Clarks asserted a claim for violating the Texas Debt Collection Act (TDCA),
relying on its catch-all provision that prohibited creditors from “using any
other false representation or deceptive means to collect a debt or obtain
information concerning a consumer.” The Clarks alleged that the creditor had
violated the TDCA by making “affirmative statements” encouraging them to apply
for a HAMP loan modification even though the modification was not available to
them and they would not be approved.
Unfortunately
for them, the district court dismissed the action, in part because the
complaint had failed to allege any violation that resulted in damages. And the
5th Circuit affirmed.
The
court began by explaining that, to maintain a cause of action under the TDCA
provision, the debt collector must have made an affirmative statement that was
false or misleading. But, none of the creditor’s alleged statements, including
the letter of eligibility, affirmatively represented that the Clarks qualified
for or would qualify for the loan modification program. An earlier opinion of
the court had made clear that even when a creditor tells a debtor “not to
worry” about qualifying for a loan modification, that encouragement is not an
affirmative statement for which TDCA relief is available.
Moreover,
said the court, communications in connection with renegotiating a loan do not
concern the collection of a debt, but instead relate to its modification and do
not support a claim under the TDCA.
The
Court rejected the Clarks’ contention that there might be circumstances in
which misrepresentations made during loan discussions were actionable under the
TDCA.
Of course, the good deed of offering credit to
eligible borrowers in a traditionally disadvantaged group is not really
altruistic. Generally, a good deed is something which helps either you or society. In this
case, though, the good deed could provide a positive economic opportunity to both
the borrower and the lender.
A lender might want to consider how best to
offer credit eligibility to traditionally disadvantaged groups. For one thing, the case may illustrate
the fact that even the best-laid policies and procedures cannot ensure every
conceivable outcome; that is, encouraging rather than discouraging a marginal
borrower to apply for a program may result in litigation. Also, some
disappointed borrowers, especially those who have lost their homes, will turn
to the courts for relief.
[i] 12 CFR § 1002.4(b)
[ii] Clark
v. Deutsche Bank Nat’l Trust Co., 791 Fed. Appx. 341 (5th Cir. 2018)
