The United States District Court for the Northern District of California recently denied a loan servicer and a loan investor’s motion to dismiss a complaint alleging that their refusal to modify a loan violated the Equal Credit Opportunity Act (“ECOA”).  See Santos v. Fay Servicing, LLC, 2016 WL 1733825 (N.D. Cal. May 2, 2016).  In the case, two individuals of Filipino descent defaulted on a loan and began applying for loan modifications.  They alleged that they received a denial letter from one of the defendants without any explanation regarding why they were denied.  They also alleged they spoke with an employee of the servicer who informed them that they “would never be approved for a modification” without providing any additional information.  They sued the defendants, alleging that they were only denied a modification because of their race in violation of California’s Unfair Competition Law (“UCL”) and ECOA.  15 U.S.C. § 1691(a).  The defendants filed a motion to dismiss, arguing (i) that a loan modification is not a covered transaction under ECOA; (ii) that the plaintiffs submitted no evidence that their race had any bearing on the denial; and (iii) that the plaintiffs had failed to properly allege economic damages under UCL.  The court denied the motion in part and granted it in part.  First, it found that a loan modification constitutes a “credit application” under ECOA.  Second, it found that the servicer’s employee’s comment that the plaintiffs “would never be approved for a modification” could plausibly be construed as an indication that the modification denials were based on the plaintiffs’ race and not their financials.  The court further found that this fact combined with the fact that they had never been given a reason for the denials satisfied the ECOA pleading requirement, and denied the motion to dismiss the ECOA claim.  Finally, the court dismissed the plaintiffs’ allegation that the defendants violated UCL and held that the plaintiffs, who were already in default before they applied for modifications, could not properly allege that the denials caused economic damages because any alleged damages existed before they had even applied for a modification.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.