A recent federal district court decision reinforces the importance of carefully maintaining a program of underwriting policies and procedures that comply with the Equal Credit Opportunity Act (ECOA). In PNC Bank, N.A. v. Miller, No: 6:13-cv-208, 2013 WL 2455972 (M.D. Fla. 06/06/13), the United States District Court for the Middle District of Florida held that a violation of the ECOA could be asserted as an affirmative defense against the enforcement of a guaranty. PNC Bank sued Sanford Miller for his default on two commercial loans and also sued Mary Kelly Miller, his wife, for her failure to repay the loans pursuant to a personal guaranty that she had executed in favor of PNC Bank. Ms. Miller asserted that PNC Bank, by requiring her to execute a personal guaranty as part of her husband’s business loans, violated the ECOA.

The ECOA provides, in relevant part, that it “shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction ... on the basis of race, color, religion, national origin, sex, marital status, or age.” 

The implementing regulations for this statute provide that a “creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested.” Any creditor found to have violated the ECOA could be liable for actual and punitive damages.

The issue in the PNC Bank case was whether a court could also decline to enforce a loan guaranty that was presumably entered into in violation of the ECOA. After reviewing the relevant case law on the issue, the District Court held that PNC Bank’s alleged violation of the ECOA could be raised as an affirmative defense to PNC Bank’s enforcement of Ms. Miller’s guaranty. At the same time, however, the District Court noted that, among the courts that have addressed this issue, there are divergent opinions as to whether a guaranty required in violation of the ECOA should be unenforceable.

In the western United States, neither the United States Court of Appeals for the Ninth nor Tenth Circuits have ruled decisively on the issue. In the Ninth Circuit, which covers Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon and Washington, lower courts that have addressed the issue recently have generally held that a violation of the ECOA can be used as an affirmative defense against the enforcement of a guaranty.

In the Tenth Circuit, which covers Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming, the issue has been addressed infrequently. The United States District Court for the District of Kansas has even issued conflicting rulings, holding that the ECOA can be used as an affirmative defense in one case but holding in another case that a guaranty is enforceable despite an ECOA violation. Thus, an abundance of caution is necessary when requiring loan guaranties from spouses of loan applicants.

The portions of the ECOA discussed above are intended to “assure that qualified applicants are able to obtain credit in their own names.” A creditor cannot require that a spouse guaranty the debt of a borrower unless the creditor relies on the spouse’s income, assets or creditworthiness for repayment of the debt. Similarly, a creditor can require all officers of a closely held corporation to personally guaranty a corporate loan, but the creditor cannot automatically require that the spouses of all officers also guaranty the loan. To do so would constitute discrimination on the basis of the applicant’s marital status. The ECOA does, however, permit a spouse to sign security instruments where the collateral pledged for the loan is at least partially owned by the spouse, such as is often the case in community property states. The ECOA also allows creditors to require a co-borrower or guarantor where the applicant does not qualify for the credit alone, but creditors cannot require that the co-borrower or guarantor be the applicant’s spouse.

As a result, lenders should ensure that they have designed and implemented an effective system for minimizing the possibility that their underwriting departments violate the ECOA’s provisions regarding discrimination on the basis of marital status, whether intentionally or unintentionally. Although automatically requiring a spousal guaranty from a married loan party may seem logical, doing so violates the ECOA and can render the lender liable for damages and other remedies and render loan documents unenforceable. This point is especially important in light of the recent United States Supreme Court ruling which struck down the Defense of Marriage Act, thereby paving the way for same-sex couples to be treated as spouses under federal law. 

Legal considerations aside, even if the ECOA permitted a lender to automatically require a spousal guaranty, doing so could often engender resistance from applicants, especially when dealing with applicants whose spouses do not want to disclose their financial information or make their assets available to the lender. In those cases, the ECOA’s requirements and practical considerations align in requiring the lender to consider a non-spouse as the co-borrower or guarantor or explore additional collateral to justify the loan to the applicant.

It should be noted that this legal alert only addresses one facet of the ECOA dealing with discrimination on the basis of marital status, and lenders should also regularly review their internal compliance procedures in light of the entire ECOA statutory regime.