Failure to Request and Obtain Required USDA Loan Guarantee Requires ECOA Adverse Action Notice

In the case of Cross v. Prospect Mortgage, LLC, No. 1:12-cv-1455 (E.D. Va., Nov. 27, 2013), a federal district court found that a mortgage lender violated the Equal Credit Opportunity Act (ECOA) when the lender failed to provide the borrower with an “adverse action” notice stating that the lender did not obtain a requested U.S. Department of Agriculture Rural Development (USDA-RD) loan guarantee. Accordingly, the court granted the plaintiff-borrower’s motion for summary judgment on her ECOA claim.

The borrower had applied for a USDA-RD guaranteed mortgage loan to refinance her existing home mortgage loan. The lender did obtain a required pre-closing conditional loan guarantee commitment from USDA. The conditional commitment contemplated a residential mortgage loan with a principal balance of $397,800 and a 5.0% interest rate, requiring the borrower to pay $5,000 in cash at closing for closing costs. However, prior to closing, the borrower requested that the lender modify the loan to finance all of the closing costs, and the lender agreed to do so subject to an increase in the interest rate to 5.375%. The borrower accepted this higher rate, and the lender advised her that the changed loan terms would require USDA approval prior to closing. The parties proceeded to close, and the borrower paid a $7,956 USDA loan note guarantee fee, which was itemized on the HUD-1 settlement statement. However, the lender apparently never sought or received from USDA a new pre-closing approval of the new loan terms. Apparently the lender knew then that the USDA would not guarantee the loan, yet it did not disclose this fact to the borrower.

Several years later, the borrower learned that her loan lacked a USDA-RD loan guarantee. When she attempted to obtain USDA-RD refinancing from a different bank, she was informed that the desired refinancing loan was not available to her because her existing loan was not USDA-guaranteed.

The court found that the lender’s failure to request or obtain the USDA-RD loan guarantee constitutes a type of adverse action under ECOA (thus requiring notice to the borrower), because it was “a refusal to grant credit in substantially the amount or on substantially the terms requested.” 15 U.S.C. sec. 1691(d)(6). According to the court, notwithstanding that the ultimate decision whether to issue the loan guarantee rested with the USDA and not the lender, “the proper reading of the ECOA adverse action notice provision requires a lender to provide notice of an adverse action even where the lender does not ultimately control the cause of the adverse action.” Cross at 8. The court also found that the presence or absence of a federal loan guarantee was a material “term” of the loan applied for.