In a case of first impression decided last month, the North Carolina Court of Appeals affirmed a trial court ruling that a guarantor-spouse may assert a violation of the Equal Credit Opportunity Act ("ECOA") as an affirmative defense in an action brought by a lender to recover under a guaranty agreement. In the decision, the lender sued its borrowers — two North Carolina limited liability companies ("LLCs") — and guarantors, including guarantor-spouses, after the loans went into default. The spouses argued that their guaranty agreements violated the ECOA because they were not members of the LLCs and were not involved in the LLCs' business affairs. The lender took the case all the way to a jury trial and lost. Unless the North Carolina Supreme Court reverses this decision, lenders should expect non-borrowing spouses to use it as a shield to attempt to avoid liability under their guaranty agreements.
The ECOA is a federal law that prohibits discrimination in lending. Among its provisions, it contains rules governing when a lender may or may not procure a spousal guaranty. Broadly speaking, a lender may not require an applicant's spouse to execute a guaranty if the applicant qualifies for the loan under the lender's underwriting standards. The ECOA differentiates between secured credit and unsecured credit. In situations where jointly-held collateral is necessary to support the lender's creditworthiness standards, the ECOA does allow a lender to require a spouse to execute a deed of trust encumbering property, but not a guaranty.
The ECOA allows a spousal guarantor to sue a lender for actual and punitive damages, but an action must be brought within the applicable statute of limitations which is two years for a guaranty executed before July 21, 2010, and five years for a guaranty executed on or after July 21, 2010. But, under the recent Court of Appeals decision, the spouse may assert the ECOA as a defense if the spouse is sued by the lender to recover under the loan. The statute of limitations will not apply in this situation.
Furthermore, the Court of Appeals held that claims under the ECOA may not be waived. The lender had entered into a forbearance agreement with the borrowers and guarantors that contained a blanket waiver and release of all claims. The Court held that since the guaranty was void because of the ECOA violation, the waiver in the forbearance agreement was void as well.