By: Joe Patry
The Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. § 1691 et seq. was enacted in 1974 “to eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit.” Mays v. Buckeye Rural Elec. Coop., 273 F.3d 837 (6th Cir. 2002), at 5 (all references to pagination is to the pagination in the .PDF copies of the cases to which this post links). Under ECOA, a creditor cannot discriminate deny an application for credit solely because of that person’s marital status. See 15 U.S.C. § 1691(a).
Based on recent decisions, the Courts of Appeal for the Eighth Circuit and Sixth Circuit are split on the question of whether a creditor may require a spouse to execute a personal guaranty for a loan. If a guarantor is considered an “applicant” under ECOA, then requiring a spouse to guarantee a loan violates ECOA and may allow the spouse to use the affirmative defense of recoupment to avoid enforcement of the personal guaranty. Last month, the Supreme Court of the United States granted the writ of certiorari to resolve this circuit split. The case has not yet been set for argument.
In Hawkins v. Community Bank of Raymore 761 F.3d 937 (8th Cir. 2014), the husbands of Plaintiffs Valerie J. Hawkins and Janice A. Patterson were the two members of PHC Development, LLC (“PHC”). Id. at 2. Patterson and Hawkins themselves had no interest in PHC. Id. From 2005 to 2008, Community Bank of Raymore (“Community”) made four loans to PHC, totaling $2,000,000. Id. Hawkins, Patterson and their husbands signed personal guaranties on the loans. Id. The loans went into default and Community demanded payment not only from PHC but also from Hawkins and Patterson as guarantors. Id.
Hawkins and Patterson sued Community, asserting that Community violated ECOA when it forced them to execute the guaranties solely because they were married to their husbands – the members of PHC. Id. Further, Hawkins and Paterson claimed that because of the alleged ECOA violation, the personal guaranties were unenforceable against them. Id. The trial court found that Hawkins and Patterson were not “applicants” within the meaning of ECOA and thus there was no ECOA violation, and granted summary judgment for Community. Id.
On appeal, the Eighth Circuit noted that ECOA makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” Id. at 3 (citing 15 U.S.C. § 1691(a)). An applicant is any person who applies “directly” to a creditor for “an extension, renewal, or continuation of credit . . . .” Id. (citing 15 U.S.C. § 1691a(b)). Interpreting this definition, the Federal Reserve Bank promulgated 12 C.F.R. § 202.2(e), which provides that the definition of “applicant” under ECOA includes guarantors. Id.
Under the Chevron doctrine, federal courts typically defer to a federal agency’s interpretation of a statute if (1) the statute is ambiguous or unclear and (2) if the agency’s reading is reasonable in light of Congress’s intent. Id. at 4; Chevron U.S.A. v. Natural Resources Defense Counsel, 467 U.S. 837 (1984). If the statute is clear, then the analysis stops and the second step is irrelevant. Hawkins at 4. Applying the first step of the Chevron doctrine, the Eighth Circuit found that ECOA was clear that a guarantor is not an applicant because ECOA requires that, to be an applicant, a person must request credit directly from a creditor. Id. However, when making a guaranty, a person does not request credit. Id. Rather, a guaranty is collateral and security for an underlying loan; although a guarantor makes the guaranty so that credit will be extended to a borrower, providing a guarantee does not constitute a request for credit. Id.
The Hawkins court noted that the Sixth Circuit recently reached a contrary conclusion in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir. 2014), where BB&T required the borrower’s wife to execute a guaranty on a commercial loan. Id. at 3. In RL BB, the borrower’s wife claimed that this requirement violated ECOA, and she argued that the personal guaranty was thus unenforceable. Id. at 4. The trial court in RL BB ruled against the borrower’s wife and found that the guaranty was enforceable. Id.
On appeal, the Sixth Circuit noted that the Federal Reserve has interpreted ECOA as prohibiting a creditor from requiring an applicant’s spouse from guaranteeing a security instrument. Id. at 5. While the Sixth Circuit noted that ECOA does not explicitly define an applicant to include a guarantor, the Sixth Circuit highlighted that the Federal Reserve’s regulations define an applicant as a guarantor (meaning that a guarantor would be able to sue for an ECOA violation). Id.
Applying the first prong of the Chevron doctrine, the Sixth Circuit found that an ambiguity existed in ECOA’s definition of “applicant” because a guarantor approaches a creditor in the sense that she offers her own personal liability if the borrower defaults. Id. Further, the Sixth Circuit explained that a guaranty is made in consideration of the borrower’s receiving credit. Id. The Sixth Circuit explained that an “applicant” requests credit, but credit is the right granted by a creditor to a debtor to defer payment of debt. Id. Thus, the Sixth Circuit found that an applicant requests credit but the debtor enjoys the benefit of the credit, and as a result, an applicant and the debtor could be different persons. Id. Looking at the larger purpose of ECOA to prevent discrimination “in any respect” of a credit transaction, the RL BB court reasoned that the broad remedial goal of the statute meant that the term applicant could be ambiguous. Id.
Because the Sixth Circuit found that the term “applicant” could be ambiguous, the court continued from where the Eighth Circuit stopped and moved on to the second prong of the Chevron analysis. Id. With respect to the second prong, the Sixth Circuit found that because an “applicant” could include a guarantor (and that a creditor could not require a spouse to be a guarantor), the Federal Reserve’s interpretation in Regulation B was reasonable and thus entitled to deference. Id. Because the borrower’s wife impermissibly had been required to execute a personal guaranty, the personal guaranty was not enforceable and the Sixth Circuit reversed the lower court’s finding and allowed the borrower to use the affirmative defense of recoupment to prevent the enforcement of the guaranty. Id. at 12.
Lenders that require a personal guaranty from a spouse should monitor the Supreme Court’s resolution of this circuit split. If the Supreme Court agrees with the Sixth Circuit, creditors should ensure that spouses are not required to execute personal guaranties on loans, as such guaranties may well be unenforceable.