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From Banking and Finance Law Daily, June 13, 2014

Spouse-guarantor can assert ECOA claim as recoupment affirmative defense

By Richard A. Roth, J.D.

A wife who personally guaranteed her husband’s real estate investment loan could raise a claim that the lender improperly conditioned the loan on that guarantee as a defense to a collection suit, according to the U.S. Court of Appeals for the Sixth Circuit. Considering the issue for the first time in the Sixth Circuit, the court determined that Reg. B—Equal Credit Opportunity (12 CFR Part 1002) properly includes a guarantor as an “applicant” who can raise a claim under the Equal Credit Opportunity Act (RL BB Acquisition, LLC, v. Bridgemill Commons Development Group, LLC, June 12, 2014, Clay, Circuit Judge).

In the wake of the recent financial crisis, one of the husband’s residential real estate development projects was in distress, with a loan that needed to be refinanced. Even after the husband and wife both agreed to provide assets as additional collateral for the loan, the lending bank’s underwriting guidelines did not permit the bank to extend enough credit to refinance the entire balance of the existing loan.

In the end, the wife executed a personal guarantee, and the bank made the loan. However, several years later the loan went into default and an investor who acquired it from the bank sued to collect. As a defense against the attempt to enforce her personal guarantee, the wife claimed the bank had made the guarantee a condition of the loan in violation of the ECOA and Reg B (12 CFR §1002.7(d)(5)).

Whether the wife provided the guarantee at her husband’s request—which would be permitted—or at the bank’s insistence—which would be a violation—was disputed. However, the trial court decided that the genesis of the guarantee did not matter because the wife was not permitted to raise the claim as a defense.

Meaning of “applicant.” The ECOA prohibits discrimination against applicants for credit, and it defines “applicant” as a person who applies for credit (15 U.S.C. §1691a). That might not seem to include a guarantor, the court’s analysis began. However, Reg. B, which implements the ECOA, expands that definition to say that, for purposes of the rule against requiring spousal guarantees, “applicant” includes guarantors, sureties, and endorsers (12 CFR §1002.2). The first question the court faced was whether the expanded definition was a permissible interpretation of the ECOA.

The court applied the two-step process established by Chevron, U.S.A., Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The first step was to decide whether the statute was ambiguous. If so, the second step was to decide whether the regulation was a reasonable interpretation of that ambiguous law.

Ambiguity. The ECOA’s use of “applicant” does not unambiguously exclude guarantors, the court said. A guarantor could be said to have applied for credit by making a formal request for an extension of credit to a third party. Moreover, under the ECOA, an applicant and a debtor are not necessarily the same person. If the applicant is not necessarily the debtor, the applicant could instead be a third person such as a guarantor, the court said.

Reasonableness. Since “applicant” could include a guarantor, the second step was to decide whether a regulatory definition establishing that inclusion was a reasonable interpretation of the law. The interpretation of the Federal Reserve Board, which initially wrote Reg. B, was entitled to deference, the court noted.

The initial draft of Reg. B would have made guarantors applicants for all purposes, the court said. However, the Fed backed away from that, instead making guarantors applicants only for the purpose of enforcing the ban on requiring spousal guarantees. That indicated a thoughtful process that was not arbitrary or capricious.

The court also considered and easily rejected the one contrary court opinion on the issue, Moran Foods, Inc. v. Mid-Atlantic Market Development Co. (7th Cir., 2007). Unlike the Seventh Circuit, the court said that it was not bothered by possible expanded creditor liability. “[W]e are not troubled by the prospect of guarantors being made whole after a creditor violates the law,” the court said. “We will not strike down a valid regulation to salvage bad underwriting.”

Availability of defense. A guarantor, as an applicant, was free to bring a timely suit or counterclaim to enforce the rule against requiring spousal guarantees. This included the ability to raise such a claim as an affirmative defense of recoupment, as the wife in this case had done.

Equity required allowing a person being sued for damages to assert an ECOA violation as a defense in an amount up to the claim, according to the court. There was nothing in the ECOA, properly interpreted, that barred affirmative defenses.

The case is No. 13-6034.

Attorneys: Thomas E. Ray (Samples, Jennings, Ray & Clem) for Starr Stone Dixon. Samuel B. Zeigler (Taylor English Duma LLP) for RL BB Acquisition, LLC.

Companies: BB&T Bank; Bridgemill Commons Development Group, LLC; RL BB Acquisition, LLC

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