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From Banking and Finance Law Daily, May 28, 2015

Is guarantor a credit applicant? CFPB tells Supreme Court yes

By Richard A. Roth, J.D.

Individuals who are required to guarantee their spouses’ credit applications are themselves credit applicants who are protected from discrimination under the Equal Credit Opportunity Act and Reg. B—Equal Credit Opportunity (12 CFR 1002), the Consumer Financial Protection Bureau is telling the Supreme Court. According to the bureau, the Reg. B definition of "applicant" that says applicants are guarantors for purposes of the ECOA prohibition on marital status discrimination is a reasonable interpretation of the act to which courts should defer. A contrary decision by the U.S. Court of Appeals for the Eighth Circuit (see Hawkins v. Community Bank of Raymore, discussed at Banking and Finance Law Daily, Aug. 5, 2014) should be reversed, the CFPB urges.

According to the bureau’s amicus curiae brief, the petitioners are two women who were required by Community Bank of Raymore to personally guarantee their husbands’ business loans. When the bank declared the loans to be in default and demanded payments under the guarantees, the women sued, asserting that the guarantee requirement violated the ECOA and Reg. B, which ban a lender from requiring that an applicant’s spouse join in a credit application. The bank countersued to enforce the guarantees, and the women raised the same ECOA and Reg. B argument as an affirmative defense to the bank’s claim.

ECOA signature demand ban. The ECOA prohibits any creditor from discriminating against any credit applicant on the basis of marital status, and this includes a prohibition against requiring one spouse to join in the other’s credit application other than as needed to create a security interest (15 U.S.C. §1691d).

The Federal Reserve Board, and later the Consumer Financial Protection Bureau, implemented this prohibition in a way that covers not just credit applications but also credit guarantees (12 CFR 1002.7(d)). Under Reg. B, a creditor may require a guarantor if an applicant does not qualify for a loan, and a spouse may choose to be that guarantor, but the creditor cannot require the spouse to be the guarantor.

Guarantor not protected. However, according to the Eighth Circuit, the bank had not required the wives to join their husbands’ applications for credit. The bank had required them to guarantee the credit. As guarantors, they had not requested credit and thus were not applicants, the Eighth Circuit decided.

The Eighth Circuit also rejected the broader Reg. B definition. Since the ECOA said unambiguously that a guarantor is not an applicant, a regulatory expansion of the definition of "applicant" was not a reasonable interpretation of the act, according to the appellate court.

CFPB argument. The CFPB bases its argument on the assertion that "applicant" is not unambiguously defined by the ECOA. As a result, under Chevron U.S.A. Inc. NRDC 467 U.S. 837 (1984), the bureau’s reasonable interpretation of the ambiguity is entitled to judicial deference.

The ECOA says only that an "applicant" is a person who "applies for credit." To "apply" for something is to ask for it, the bureau says, and a guarantor asks that credit be extended to the primary borrower. There is no restriction in the ECOA or in ordinary language that applicants only are individuals who ask for credit for themselves, the bureau points out.

The broader Reg. B definition advances the ECOA’s purposes, the bureau adds. Requiring a spousal guarantee actually discriminates against both spouses, because one spouse is forced to accept an unwanted liability and the other loses the ability to maintain a separate credit history.

Permitting a lender to require a spousal guarantee would result in arbitrarily different treatment of spouses based on their capacities, the CFPB continues—a spouse who was forced to sign an application would be protected by the ECOA, but a spouse who signed as a guarantor would not.

Other circuits’ decisions. The U.S. Court of Appeals for the Sixth Circuit disagrees with the Eighth Circuit and supports the CFPB position. In RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC (see Banking and Finance Law Daily, June 13, 2014), the Sixth Circuit decided that the ECOA definition of "applicant" was ambiguous, requiring the court to decide whether the Reg. B definition was reasonable. The Sixth Circuit said the definition was reasonable and allowed a woman who said she had been required to guarantee her husband’s loan to raise the ECOA ban as an affirmative defense to a collection suit.

On the other hand, the U.S. Court of Appeals for the Seventh Circuit agrees with the Eighth Circuit. In Moran Foods, Inc. v. Mid-Atlantic Mkt. Dev. Co., the Seventh Circuit refused to allow a woman who joined her husband in guaranteeing the debts of her husband’s corporation to claim the benefits of Reg. B. Addressing the argument that "applicant" included a guarantor, the Seventh Circuit said "We doubt that the statute can be stretched far enough to allow this interpretation."

The case is Dkt. No. 14-520.

Supreme Court docket. For details about this and other petitions and cases pending before the Supreme Court, please consult this list of selected banking and finance law cases awaiting decision in the 2014 term.

Attorneys: John Matthew Duggan and Jay T. Shadwick (Duggan Shadwick Doerr & Kurlbaum LLC) for Valerie J. Hawkins and Janice A. Patterson. Greer Shirreffs Lang (Lathrop & Gage, LLP) for Community Bank of Raymore.

Companies: Community Bank of Raymore

MainStory: TopStory CFPB EqualCreditOpportunity Loans SupremeCtNews

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