On the heels of the Sixth Circuit Court of Appeals’ decision in the RL BB Acquisition case that we wrote about a couple of weeks ago comes a contrary decision from the Eighth Circuit on exactly the same issue. Is a credit guarantor an “applicant” for credit, so that the protections of the Equal Credit Opportunity Act (ECOA) extend directly to a credit guarantor? The Eight Circuit says no.
The case of Hawkins v. Community Bank of Raymore was brought by two real estate developers’ wives who claimed that the Bank required that they guaranty a loan to their husbands’ business, PHC Development, LLC, solely because they were married to the two principals. When the husbands’ business was unable to make the payments on the loan, the bank declared the loan in default and demanded payment from both the business and the guarantors, including the wives. The wives sued the bank, alleging discrimination on the basis of marital status. The district court found that as credit guarantors, the wives were not “applicants for credit” as defined by ECOA. The wives appealed, and the Eighth Circuit upheld the District Court’s interpretation.
ECOA makes it unlawful for a creditor to “discriminate against any applicant with respect to any aspect of a credit transaction….on the basis of …marital status.” The Act defines “applicants” as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit.” When the Federal Reserve wrote Regulation B to implement ECOA, it interpreted “applicant” to include spouse-guarantors. The wives relied upon this interpretation in asserting they were entitled to ECOA’s protections.
The issue before the Court was whether this interpretation was reasonable. Both courts used the Chevron standard created by the Supreme Court in the case ofChevron U.S.A. v. Natural Resources Defense Council in 1984 to analyze the issue. The Chevron standard asks whether Congress’ meaning is clear, and if so, the regulatory agency has no latitude in its interpretation of the statute. The Sixth Circuit in the RL BB Acquisition case decided that whether Congress intended to include credit guarantors in the definition of “applicant” was unclear, and as a result, the Federal Reserve was permitted deference in its interpretation to include credit guarantors as applicants, and that such interpretation was reasonable. It concluded that a guarantor is a third party to the larger application process. The Eighth Circuit, however, determined that Congress’ intent was in fact clear and unambiguous. According to the ECOA, to be an “applicant”, a person must “apply to a creditor directly for … credit, or …indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” The Court took a more narrow approach, reasoning that the wives did not apply for credit by simply by executing a guaranty. Assuming a secondary liability does not amount to a request for credit. It looked at the plain meaning of “apply”, and found it required a formal request, often in writing. Thus, by concluding that the statute was unambiguous, it found that the Federal Reserve did not have the latitude to include a spouse-guarantor in its definition of “applicant”.
The Eighth Circuit also considered Congress’ goals in enacting ECOA, and reasoned that denying ECOA protection to spouse-guarantors was not inconsistent with those goals. Since one purpose of ECOA was to prevent lenders from denying credit to married women applicants based upon their marital status, refusing to extend the protection to spousal guarantors would not frustrate that purpose. In fact, by requiring a borrower to furnish a guarantor the lender does not exclude the guarantor from the lending process or deny the guarantor access to credit – quite the opposite, as the guarantor is in fact included in the lending process.
While this split in judicial decisions means that the cases may provide the basis for an appeal to the Supreme Court, they do not mean that the Spousal Guarantor Rule is no longer applicable. It continues to be a violation of ECOA and Regulation B (12 CFR Section 1002.7(d)) for a lender to specifically require that the spouse of a credit applicant (other than a joint applicant) co-sign or guaranty a loan. The holding in these two cases concerns whether a guarantor is entitled to the protections from discrimination provided by ECOA, and can seek relief for a violation of under that law. The decisions do not affect the right of an applicant for credit to bring an action for discrimination under ECOA based upon a violation of Section 1002.7(d). Lenders should continue to exercise caution when requiring a spousal guaranty, by properly documenting the underwriting basis for the requirement, as discussed in our earlier post found here: ECOA Spousal Guarantee