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From Banking and Finance Law Daily, August 5, 2014

Spouses who guaranty loans aren’t applicants under equal credit law

By Richard A. Roth, J.D.

Two real estate developers’ wives who claimed they were required by a bank to guaranty their husbands’ business loans were not credit applicants under the Equal Credit Opportunity Act, according to the U.S. Court of Appeals for the Eighth Circuit. This means the bank would not have engaged in credit discrimination by requiring the guarantees, the court said (Hawkins v. Community Bank of Raymore, Aug. 5, 2014, Gruender, Circuit Judge).

The facts described by the wives likely are not unique, given recent conditions in real estate development. The husbands borrowed more than $2 million to fund a residential real estate project between 2005 and 2008, and the wives guaranteed the loans. When the development company was unable to make payments, the bank declared a default and demanded payment both from the company and from the wives as guarantors.

The wives then sued the bank, claiming that it had required them to guarantee the loans as a condition of credit. This, they said, constituted discrimination on the basis of marital status in violation of the ECOA and Reg. B—Equal Credit Opportunity (12 CFR Part 202, now 12 CFR Part 1002).

Equal credit rules. The ECOA prohibits any creditor from discriminating against any credit applicant on the basis of marital status (15 U.S.C. §1691(a)), and this includes a prohibition against requiring one spouse to join in the other’s credit application other than 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 a guarantor.

Trial court proceedings. The federal district judge decided that, under the ECOA, a credit guarantor is not a credit applicant. The ECOA prohibits a bank from requiring a spouse to sign an application, but it does not prohibit a bank from requiring a spouse to sign a guarantee, the judge said. As a result, the judge entered summary judgment against the wives.

What is an applicant? The ECOA defines “applicant” in part as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit.” The Fed interpreted the law as including spouse-guarantors (12 CFR §202.7, now 12 CFR §1002.7). The question, according to the appellate court, was whether this is an acceptable interpretation.

The court’s answer was no.

Whether a regulatory agency’s interpretation of a statute should be accepted by the courts is decided under the process created by the Supreme Court inChevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984), the court said. Chevron creates a two-step process, the first step of which is considering whether Congress’s intended meaning is clear. If so, no further debate is needed.

The ECOA text is clear that a credit guarantor is not a credit applicant, the court said. An applicant is a person who requests credit, and a guarantor has made no such request. Obviously the guarantor wants the application to be approved, but that desire is not the same as an application.

Contrary decision. The appellate court noted, and rejected, a recent contrary decision by the U.S. Court of Appeals for the Sixth Circuit in RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC (see Banking and Finance Law Daily, June 13, 2014). The Sixth Circuit’s Chevron analysis reached the opposite decision, finding that the ECOA was ambiguous. The Sixth Circuit then continued to step two of the analysis and decided that the regulatory agency interpretation was reasonable.

“We find it to be unambiguous that assuming a secondary, contingent liability does not amount to a request for credit. A guarantor engages in different conduct, receives different benefits, and exposes herself to different legal consequences than does a credit applicant,” the Eight Circuit said in reply.

Because the ECOA unambiguously says that a credit guarantor is not a credit applicant, Reg. B’s contrary interpretation is entitled to no deference, the court concluded.

Statutory intent. According to the Eighth Circuit, denying protection to spouse-guarantors is consistent with the purpose of the ECOA. The ECOA was intended to prevent lenders from excluding borrowers—especially women—from the credit market based on their marital status. The spouses in this case were not complaining about having been excluded from the market, the court said; rather, they were complaining that they were improperly included. That was not part of the ECOA’s goal.

The case is No. 13-3065.

Attorneys: Deron A. Anliker (Duggan & Shadwick) for Valerie J. Hawkins. Eric W. Collins (Collins & Jones) for Community Bank of Raymore.

Companies: Community Bank of Raymore

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