JOHN SCHLEGEL V. WELLS FARGO BANK N.A | Ninth Circuit - Equal Credit Opportunity Act... Default Notices Violated the Loan Modification Agreement

FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

JOHN SCHLEGEL, on behalf of himself and all others similarly situated; CAROL ROBIN SCHLEGEL, on behalf of herself and all others similarly situated, Plaintiffs-Appellants, v. WELLS FARGO BANK, NA, Defendant-Appellee. EXCERPTS: SUMMARY** Foreclosure The panel affirmed in part and reversed in part the dismissal of an action seeking relief under the Fair Debt Collection Practices Act and under the Equal Credit Opportunity Act, which makes it illegal for a creditor to discriminate against a credit applicant on the basis of race, color, religion, national origin, sex or marital status, or age. The panel held that appellants’ complaint did not plausibly allege that a bank that sent mortgage default notices despite the existence of a loan modification agreement was a “debt collector” under the FDCPA because the complaint did not allege that the principal purpose of the bank’s business was debt collection, or that the bank was in the business of collecting the debts of others. The panel rejected a per se rule that a creditor cannot meet the definition of a debt collector. The panel held that the complaint stated a claim under ECOA’s notice requirement, which provides: “Each applicant against whom adverse action is taken shall be entitled to a statement of reasons for such action from the creditor.” The panel held that the bank’s alleged acceleration of appellants’ debt constituted a revocation of credit and thus met the definition of adverse action. [...] B The Schlegels’ complaint also raises a claim under ECOA, which makes it illegal “for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of race, color, religion, national origin, sex or marital status, or age.” 15 U.S.C. § 1691(a)(1). One way that ECOA effectuates this goal is through its notice requirement, which states: “Each applicant against whom adverse action is taken shall be entitled to a statement of reasons for such action from the creditor.” Id. § 1691(d)(2). ECOA defines an “adverse action” as a:

denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested. Such term does not include a refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default, or where such additional credit would exceed a previously established credit limit. Id. § 1691(d)(6).

When a creditor takes an adverse action against an applicant without giving the required notice, the applicant may sue for a violation of ECOA. Id. § 1691e (“Any creditor who fails to comply with any requirement imposed under this subchapter shall be liable to the aggrieved applicant for any actual damages sustained by such applicant”); see also Thompson v. Galles Chevrolet Co., 807 F.2d 163, 166 (10th Cir. 1986) (quoting Sayers v. Gen. Motors Acceptance Corp., 522 F. Supp. 835, 840 (W.D. Mo. 1981)). The Schlegels contend that Wells Fargo’s acceleration of their debt constituted a “revocation of credit” for purposes of the definition of “adverse action.” ECOA defines “credit” to mean “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor.” 15 U.S.C. § 1691a(d). ECOA does not define “revocation,” and so we read it as having its plain meaning: “The action of revoking, rescinding, or annulling; withdrawal.” Oxford English Dictionary 838 (2d ed. 1989); see also id. (defining “revoke” as “[t]o annul, repeal, rescind, cancel”); Merriam- Webster’s Collegiate Dictionary 1068 (11th ed. 2005) (defining “revoke” to mean: “to annul by recalling or taking back”). Thus, a lender revokes credit when it annuls, repeals, rescinds or cancels a right to defer payment of a debt. Here, the Schlegels’ complaint plausibly alleges that Wells Fargo annulled, repealed, rescinded, or canceled their right to defer repayment of their loan. Paragraph 25 of their complaint alleges that, on December 20, 2010, the Schlegels received a notice from the bank informing them that, “due to the default under the terms of the mortgage or deed of trust, the entire balance is due and payable.” The complaint’s allegations establish that the Schlegels made diligent efforts to determine whether Wells Fargo’s default notices were mere clerical errors or represented Wells Fargo’s termination of the loan modification agreement. Based on Wells Fargo’s prolonged non-responsiveness, and its affirmative statements regarding loan acceleration and default, the facts alleged plausibly give rise to the claim that Wells Fargo terminated the loan modification agreement and thereby revoked the Schlegels’ credit for purposes of § 1691(d)(6). Wells Fargo argues that its default notices to the Schlegels did not constitute adverse actions because the default notices had no binding effect and did not modify the terms of the Schlegels’ loan or the loan modification agreement. We disagree. In essence, Wells Fargo is arguing that because its default notices violated the loan modification agreement, they could not constitute a revocation of credit. But 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. When Wells Fargo informed the Schlegels that it had accelerated their loan and was commencing foreclosure proceedings, its statements communicated the bank’s refusal to abide by the terms of the loan modification agreement, which had given the Schlegels a longer period to repay the loan. On its face, this communication revoked the prior credit arrangement. While sending a mistaken default notice would not necessarily constitute an adverse action, the Schlegels’ complaint describes egregious conduct that goes far beyond clerical error. In fact, despite the Schlegels’ repeated inquiries, Wells Fargo did not inform the Schlegels that its acceleration of their loan was a mistake until after the Schlegels filed a complaint. While Wells Fargo now claims that its acceleration of the loan was an unintentional error, and that the prior loan modification agreement remains in effect, such assertions do not erase its prior revocation of credit for purposes of ECOA. Because the parties agree that Wells Fargo did not send the Schlegels an adverse action notice, the complaint’s allegations that Wells Fargo took an adverse action without complying with ECOA’s notice requirements are enough for the ECOA claim to survive a motion to dismiss. Accordingly, we reverse the district court’s dismissal of their ECOA claim and remand for proceedings consistent with this opinion. Each party will bear its own costs on appeal.