What Missouri state court giveth, Missouri federal court taketh away. The Western District has decided whether the Equal Credit Opportunity Act (“ECOA”) applies to guarantors. Good news, Creditors! It does not. Less than four months following Frontenac Bank v. T.R. Hughes, Inc. in which the Missouri Court of Appeal’s held that guarantors are protected under the ECOA, as provided for in Regulation B, the Western District holds that Regulation B’s expansion of the categories of persons protected under the ECOA is unauthorized and thereby limits the statutory protections to the extent originally intended by Congress.
In Arvest Bank v. Uppalapati, Branson Resort Properties (“Borrower”), through a series of loans, borrowed in excess of $2.8 million from Arvest Bank (“Bank”) for the development of 62 lots in Legends at Branson Creek. Each loan was guaranteed by each of Borrower’s 50% individual owners and the spouse of one owner, Vijayasree Uppalapati (“Spouse”), who had no other connection to Borrower. The Borrower defaulted. Arvest sued Borrower and the guarantors to collect the debt and moved for summary judgment. In Spouse’s opposition to summary judgment, she argued that Arvest violated ECOA and Federal Reserve Regulation B by requiring her to guarantee Borrower’s debt.
The ECOA, designed in part to end discriminatory lending practices targeted at married women, prohibits a creditor from discriminating against any applicant for credit on the basis of race, color, religion, national origin, sex or marital status, age or because the applicant is on public assistance. The ECOA defines applicant as “any person who applies to a creditor directly for an extension, renewal or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” The Board of Governors of the Federal Reserve System (the “FRB”), as authorized under the ECOA, promulgated and adopted Regulation B which expanded the definition of applicant to include, among others, guarantors and prohibited creditors from requiring the signature of persons other than the applicant when the applicant qualified under the creditor’s standards of creditworthiness.
At issue on summary judgment was whether Spouse is an applicant covered by the ECOA’s non-discrimination provision. Arvest argued Spouse is not an applicant because she never applied for credit. Spouse argued that, as a guarantor, she is covered. The court agreed with Arvest. The FRB overreached in broadening the class of protected persons under the statute. The court held that the definition of applicant was unambiguous in the statute and thus Regulation B is an impermissible construction thereof “extending liability beyond that which Congress intended.” The court specifically declined to follow Frontenac Bank v. T.R. Hughes, Inc. on the grounds that a federal court is not bound by a state court decision on a matter of federal statutory law.
The court further held that Spouse could not prove discrimination or that she was required to sign the guaranty even if the FRB’s definition of applicant was authorized. There was little evidence of Arvest’s intent in requiring Spouse’s guaranty, e.g., joint ownership of assets with her husband that may have been a necessary condition to guaranteeing Borrower’s debt. Moreover, Spouse failed to satisfy her burden of showing that she was required to sign the guaranty that, notably, included her personal acknowledgement that she “signed this guaranty to induce [Arvest] to extend such credit.”
Although Arvest Bank is great case law for creditors, we await binding precedent from the Eighth Circuit. Notably, the Missouri Supreme Court denied Frontenac Bank’s transfer application—after Arvest Bank was decided—suggesting that the dichotomy between Missouri state and federal courts’ positions regarding the applicability of the ECOA to guarantors will endure for the time being. In the meantime, creditors should continue to take care in requiring spousal guaranties when the applicant is independently creditworthy and the spouse is not otherwise c0nnected to the borrower.