In Estate of Davis v. Wells Fargo Bank, 2011 WL 93030 (7th Cir. Jan. 12, 2011), the plaintiff asserted claims arising from her 1999 mortgage loan refinancing which, in a prior action against the original defunct lender, was determined to have been fraudulent. In 2002, the plaintiff defaulted on her loan and Wells Fargo Bank, as the ultimate assignee of the loan, made various attempts, in conjunction with the loan servicer, Litton Loan Servicing, to obtain repayment of the loan from the plaintiff. In one such attempt, in 2005, the loan servicer sent the plaintiff a loan modification proposal on behalf of Wells Fargo.

In the present lawsuit, the plaintiff alleged violations the Equal Credit Reporting Act (“ECOA”), the Fair Housing Act (“FHA”), the Home Ownership and Equity Protection Act (“HOEPA”) and state law claims. The Seventh Circuit affirmed dismissal of the state law claims, holding that the unconscionability claim was premised on the actual mortgage loan purchase in 1999 and was, therefore, outside of the statute of limitations. The fraud claim related to the defendants’ efforts to obtain repayment of the loan despite a court’s previous determination that it was fraudulent. The court of appeals affirmed dismissal of the fraud claim agreeing with the district court that the plaintiff had failed to allege that she had relied on the demands for repayment or suffered any damages as a result of those demands.

Next, the Seventh Circuit considered the district court’s dismissal of the plaintiff’s claim that the defendants violated HOEPA by (1) failing to notify her when they became holder and servicer of the loan; (2) failing to provide appropriate disclosures in the 2005 loan modification proposal; and (3) failing to inform the plaintiff or the court in a prior foreclosure proceeding of the terms of plaintiff’s loan. The Seventh Circuit agreed that the plaintiff had failed to state a claim under HOEPA because HOEPA requires a creditor/lender to inform a borrower of changes to initial financing terms. Here, the plaintiff had not alleged “that the defendants failed to notify her of a change in her loan terms after she signed the closing documents or that there was any change in her loan’s terms.”

The plaintiff’s ECOA and FHA claims, to the extent premised on conduct within the statute of limitations, were based on the allegation that the 2005 loan modification proposal targeted the plaintiff with oppressive terms on account of race. As to the ECOA claim, the Seventh Circuit disagreed with the district court’s determination that the plaintiff had failed to allege that she was an “applicant” for credit as required to state an ECOA claim. According to the Seventh Circuit, the phrase “applicant” as defined by 12 C.F.R. § 202.2 includes one who “received an extension of credit” and the 2005 loan modification proposal qualified as such an extension of credit. Nevertheless, the district court’s dismissal of the ECOA claim on the grounds stated constituted harmless error because that claim would, in any event, have been dismissed at summary judgment on the same grounds as the plaintiff’s FHA claim.

The Seventh Circuit affirmed summary judgment of the plaintiff’s claim under Section 3604(b) of the FHA because, after the district court struck all four of the declarations that plaintiff submitted in opposition to summary judgment on evidentiary / procedural grounds, the court held that the plaintiff lacked any evidence, aside from her own testimony, of racial discrimination. The court of appeals hinted that even if the plaintiff’s declarations had not been stricken, they would not have presented evidence of discrimination because none of them related specifically to the plaintiff’s loan. In addition to the FHA claim, the lack of any evidence of discrimination would have warranted dismissal of the plaintiff’s ECOA claim, which also requires evidence of discrimination, had it not already been dismissed at the pleadings phase.

Given its fact specific context and susceptibility to statutes of limitations issues, the Estate of Davis case has limited implications for consumer financial services litigation. However, it does demonstrate that loan modification proposals, which have become standard fare in the current foreclosure climate, can subject a mortgage lender or servicer to ECOA liability assuming that the plaintiff can submit sufficient evidence of discrimination to create a triable fact at summary judgment.