Supreme Court to Focus Legal Spotlight on Spousal Guaranty Issues

There are a number of circumstances where a lender can require the signature of the applicant's spouse. For example, when there is an application for unsecured credit and the applicant relies on property owned jointly with the applicant's spouse, the lender can require the signature of the applicant's spouse but only on the instruments necessary to enable the lender to reach the property in the event of a default. In community property states, if the applicant is relying on collateral located in such state to qualify for the credit, a lender can require the signature of the applicant's spouse, but only to the extent necessary to make the community property available to satisfy the debt in the event of default. Similarly, when an applicant is seeking secured credit, a lender can require the signature of the applicant's spouse if the property offered as security requires the spouse's signature to create a valid lien.

The ECOA has sharp teeth for enforcement. Unlike other consumer protection laws, such as the Truth in Lending Act, the ECOA applies both to open-ended and closed-ended, secured and unsecured extensions of consumer and business credit. ECOA violations may subject creditors to actual damages, punitive damages of $10,000 (or in a class action, the lesser $50,0000 or 1% of the net worth of the creditor), as well as reasonable attorneys' fees and other relief as the court may deem appropriate ' which may include voiding a spousal guaranty.

Originally, the Federal Reserve Board was mandated by Congress to oversee the ECOA. Recently, however, the Dodd-Frank Act transferred this authority to the Consumer Finance Protection Bureau (CFPB). In June 2013, the CFPB issued detailed guidance on the ECOA, including a synopsis of the rule and prohibited activities under Regulation B, a description of CFPB's Examination Procedure and a Regulation B Examination Checklist (the CFPB Exam Manual). The Exam Manual can be found at http://tinyurl.com/npm7pbg.

The CFPB Exam Manual details a three-part examination procedure, the essence of which is: 1) to determine whether a creditor has established sufficient policies, procedures and internal controls in order to comply with the ECOA and Regulation B; 2) to determine whether the creditor has discriminated against members of a protected class in any aspect of its credit operations; and 3) to determine whether the creditor is in compliance with the requirements of the ECOA set forth in Regulation B.

The CFPB has taken the position that it has two principal theories of liability under the ECOA that it can take against lenders: disparate treatment and disparate impact. Disparate treatment occurs when a creditor treats an applicant differently based on a prohibited basis such as race or national origin. Disparate impact occurs when a creditor employs facially neutral policies or practices that have an adverse effect or impact on a member of a protected class unless it meets a legitimate business need that cannot reasonably be achieved by means that are less disparate in their impact. Under the theory of disparate impact, the government or private litigant can bring claims based solely on statistics that suggest an otherwise neutral policy disparately affects protected classes. Unlike other illegal credit discrimination claims, disparate impact claims do not require the government or a private plaintiff to prove intent to discriminate.

The Supreme Court has recently held that disparate impact is a recognizable theory of recovery under the Federal Housing Act (FHA). See Texas Dept. of Housing and Community Affairs, et al., v. Inclusive Communities Project, Inc., et al., 576 U.S.___ (2015) (decided June 25, 2015). This ruling that disparate impact claims are cognizable under the FHA is not one in which disparate impact claims are cognizable under the ECOA because the ECOA's text differs in certain important respects from that of the FHA. However, a number of lower federal district courts have concluded that disparate impact claims can be brought under the ECOA. See Golden v. City of Columbus, 404 F.3d 950, 963 (6th Cir. 2005) (“Neither the Supreme Court nor this Court has previously decided whether disparate impact claims are permissible under ECOA. However, it appears that they are ' “) cert. denied , 126 U.S. 738 (2005). Footnote 11.

Moreover, the executive administration has recently established programs, such as the Affirmatively Furthering Fair Housing database compiled by the Department of Housing and Urban Development (HUD) with a stated purpose of obtaining data for use in disparate impact analysis. Additional databases are being compiled by the Department of Education's Civil Rights Data Collection project and the Federal Housing Finance Agency's National Mortgage Database Project among others. The information in these types of databases may make data more readily available for use by plaintiffs in asserting disparate impact cases against lenders. Due to these issues, lenders of all sizes need to focus more carefully than ever on their fair lending compliance.

Federal Circuit Courts Cannot Agree on Who Is Entitled to Bring an ECOA Action

The row over the interpretation of the ECOA and its implementation of Regulation B stems from the fact that if an application for credit qualifies for credit under the lender's standards of creditworthiness, the lender is prohibited from requiring the signature of an applicant's spouse on the credit instruments. Under the ECOA, only an “applicant” can bring a claim under the ECOA and the ECOA did not separately define who an “applicant” is for purposes of the statute. The Federal Reserve, in drafting revisions to Regulation B (which implemented the ECOA), went ahead and redefined “applicant” to include “guarantors.” Some courts have held that the term “applicant” was clear and that a guarantor is not an applicant because, under the plain language of the statute itself, a guarantor neither requests nor receives credit. Therefore, since the term “applicant” is not ambiguous, personal guarantors are not “applicants” and they cannot assert a cause of action under the ECOA. See Moran Foods v. Mid-Atlantic Market Development Co., LLC, 476 F.3d 436 (7th Cir. 2007). These courts have held that the Federal Reserve, in redefining “applicant” to include guarantors, expanded the relief provided by the ECOA beyond what Congress intended.

The Eighth Circuit, in Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014), ruled that whatever wisdom the Federal Reserve exercised in expanding who could bring a claim under the ECOA, it was not a decision that the Federal Reserve could make. Congress limited a cause of action under the ECOA to an “aggrieved applicant,” the statute gave “applicant” its ordinary meaning and any decision to expand the liability of lenders and to provide a cause of action for guarantors must come from Congress.

In direct contrast to the Eighth Circuit's Hawkins decision, the U.S. Court of Appeals for the Sixth Circuit, in RL BB Acquisition, LLC v. Bridgemill Common , 754 F.3d 380 (6th Cir. 2014) (concurrence Judge Colloton), determined that the term “applicant” was ambiguous and that the Federal Reserve's definition, which included guarantors, was a permissible interpretation of an ambiguous statutory term. In doing so, the court ruled that a spousal guarantor can assert a cognizable claim under the ECOA. Thus, the stage was set for the Supreme Court to resolve the differences between the federal circuits on the issue of whether a spousal guarantor was an 'aggrieved applicant' for purposes of asserting a claim under the ECOA.

The Supreme Court has granted certiorari to the petitioners in the Eighth Circuit's Hawkins decision to resolve the split in the federal appeals courts on the issue of: 1) whether guarantors are unambiguously excluded from being an applicant under the ECOA because they have not applied for credit; and 2) whether the Federal Reserve had authority under the ECOA to issue regulations that included spousal guarantors as “applicants” under the ECOA.

What Remedies Does the Spousal Guarantor Have if the Lender Violated the ECOA?

Spousal guarantors facing a lawsuit by a lender for a breach of the underlying credit agreement may have a powerful and potentially effective defense by claiming that the lender violated the ECOA. Some courts have held that a spousal guarantor could avoid their spousal guaranty as a remedy for a lender's violation of the ECOA and Regulation B. In these cases, spousal guarantors assert as an affirmative defense that a lender's violation of the ECOA permits the spousal guarantor to avoid the guaranty, rendering it unenforceable. See, e.g., Integra Bank/Pittsburgh v. Freedom, 839 F. Supp. 326 (E.D. Penn. 1993) and Silverman v. Eastrich Multiple Investor Fund, L.P., 51 F.3d 28 9 (3rd Cir. 1995).

Other courts have ruled that a violation of the ECOA and Regulation B does not void the spousal guaranty because the ECOA does not contain express language that permits voiding the underlying guaranty obligations as a remedy for an ECOA violation. See, e.g., CMF Virginia Land, L.P. v. Brinson, 806 F. Supp 90 (E.D. VA 1992) and Diamond v. Union Bank and Trust of Bartlesville, 776 F. Supp. 542 (N.D. Okla. 1991). These courts have held that an ECOA violation must be brought as a compulsory counterclaim instead of an affirmative defense. A counterclaim requirement forces the spousal guarantor to pursue a claim for violation of the ECOA in a separate action from the creditor's claim on the spousal guaranty. This is strategically meaningful for the creditor since a creditor may be able to obtain judgment on a spousal guaranty prior to the resolution of the ECOA counterclaim.

Although the Supreme Court decided to hear the Hawkins appeal, the precise issue of whether a spousal guarantor may avoid his or her guaranty was not directly addressed in the Eighth Circuit's Hawkins decision. However, the Sixth Circuit's RL BB Acquisition decision did expressly rule that Regulation B could be asserted as an affirmative defense by the spousal guarantor. Therefore, it is unknown whether the Supreme Court will resolve the conflict in the lower courts concerning whether a spousal guarantor is entitled to avoid their guaranty as a remedy for a creditor's violation of the ECOA. It is this author's hope that the Supreme Court will address this issue, as the uncertainty of the remedy for an ECOA violation as it relates to spousal guaranties creates or prolongs litigation and injects uncertainty into creditors' underwriting decisions.

One potentially interesting tie in with the spousal guarantor issues is the recent Supreme Court's recent decision in Obergefell v. Hodges regarding same-sex marriage. Lenders should update policies and forms to ensure that their internal compliance and education extends to same-sex spouse situations. Although the issue has not been addressed by any court that the author has identified, a lender would be wise to ensure that its lending practices recognize this change in the legal landscape as to who may qualify as a spouse for purposes of the ECOA.

Practice Pointers for Spousal Guaranties Under the ECOA and Regulation B

Spousal guaranties are going to be in the legal spotlight during the Supreme Court's next term, and there are a number of steps a prudent lender can take now to minimize the potential for costly litigation and regulatory enforcement actions over ECOA violations. Lenders would be well served to adopt policies and procedures to ensure compliance with the ECOA and Regulation B, and properly educate sales persons and loan officers as to those requirements. Those policies and procedures should clearly identify the circumstances under which a lender may request a spouse's signature for equipment financing and security documents.

Lenders should also implement and thoroughly document their creditworthiness guidelines, which should be clear, objective and neutral in terms of protected classes. Lenders should also take the time to identify all “form” equipment financing documentation currently used by loan officers, such as a loan applications and credit applications, and confirm that those forms are neutral as to protected classes and that any “form” requirements for spousal information and guaranties are eliminated.

To the extent that a spousal guaranty is permissible, creditors should carefully document the basis for the spousal guaranty and how it was obtained including: 1) that a spousal guaranty was offered voluntarily and document such fact by a written acknowledgement that the guaranty was voluntary given and not required; 2) that no other guarantor was willing to provide a guaranty acceptable to the lender; 3) that the initial application submitted to the lender was for joint credit of both spouses; 4) use of gender-neutral application forms and underwriting guidelines; 5) under state law, the collateral to secure the indebtedness required the signature of both spouses to create a valid and enforceable lien or that the applicant needed collateral jointly owned by both spouses in order to be creditworthy under the lender's credit guidelines; 6) that the applicant alone did not satisfy the lender's standards of creditworthiness and the reasons why; 7) that the submission of a joint financial statement or other evidence of jointly held assets should not automatically considered to be a joint application for credit; and 8) that both spouses were advised of their rights under the ECOA.

Dennis A. Dressler is a member of Dressler Peters, LLC, a Chicago-based law firm that represents banks and equipment finance companies. A member of this newsletter's Board of Editors, Dressler can be contacted at [email protected]. The author gratefully acknowledges the assistance of summer associate Robert Laverty in the preparation of this article.

Spousal guaranties are about to receive additional scrutiny now that the United States Supreme Court has decided to grant certiorari to a decision by the U.S. Court of Appeals for the Eighth Circuit regarding whether a spousal guarantor is an “applicant” entitled to bring an action under the Equal Credit Opportunity Act (ECOA) and related implementing regulation (Regulation B). The focus on spousal guaranties by the Supreme Court will create more awareness among borrowers and their counsel about this potential guarantor defense, and provide a reminder to lenders to make sure that their internal underwriting policies and guarantor forms are in compliance. Additionally, it is a good opportunity for lenders to update their forms to protect against the most common guarantor defenses. This article explores the Regulation B split over who can be defined as an applicant and provide guidance on compliance with ECOA and Regulation B on spousal guaranty issues.

The Genesis of the ECOA and Regulation B

The ECOA was initially adopted in the mid 1970s in an attempt to curb perceived widespread discrimination against women and to make credit equally available to all creditworthy customers, regardless of their gender or marital status. Specifically, under Regulation B, a creditor may generally not require the signature of a credit applicant's spouse or any other person (other than a joint applicant) on any credit instrument if the applicant otherwise qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested. The ECOA specifically permits a lender to require a guaranty if the applicant is not independently creditworthy, but prevents the lender from requiring that the guarantor be the applicant's spouse. See 12 C.F.R. Section 202.7(d)(5).

There are a number of circumstances where a lender can require the signature of the applicant's spouse. For example, when there is an application for unsecured credit and the applicant relies on property owned jointly with the applicant's spouse, the lender can require the signature of the applicant's spouse but only on the instruments necessary to enable the lender to reach the property in the event of a default. In community property states, if the applicant is relying on collateral located in such state to qualify for the credit, a lender can require the signature of the applicant's spouse, but only to the extent necessary to make the community property available to satisfy the debt in the event of default. Similarly, when an applicant is seeking secured credit, a lender can require the signature of the applicant's spouse if the property offered as security requires the spouse's signature to create a valid lien.

The ECOA has sharp teeth for enforcement. Unlike other consumer protection laws, such as the Truth in Lending Act, the ECOA applies both to open-ended and closed-ended, secured and unsecured extensions of consumer and business credit. ECOA violations may subject creditors to actual damages, punitive damages of $10,000 (or in a class action, the lesser $50,0000 or 1% of the net worth of the creditor), as well as reasonable attorneys' fees and other relief as the court may deem appropriate ' which may include voiding a spousal guaranty.

Originally, the Federal Reserve Board was mandated by Congress to oversee the ECOA. Recently, however, the Dodd-Frank Act transferred this authority to the Consumer Finance Protection Bureau (CFPB). In June 2013, the CFPB issued detailed guidance on the ECOA, including a synopsis of the rule and prohibited activities under Regulation B, a description of CFPB's Examination Procedure and a Regulation B Examination Checklist (the CFPB Exam Manual). The Exam Manual can be found at http://tinyurl.com/npm7pbg.

The CFPB Exam Manual details a three-part examination procedure, the essence of which is: 1) to determine whether a creditor has established sufficient policies, procedures and internal controls in order to comply with the ECOA and Regulation B; 2) to determine whether the creditor has discriminated against members of a protected class in any aspect of its credit operations; and 3) to determine whether the creditor is in compliance with the requirements of the ECOA set forth in Regulation B.

The CFPB has taken the position that it has two principal theories of liability under the ECOA that it can take against lenders: disparate treatment and disparate impact. Disparate treatment occurs when a creditor treats an applicant differently based on a prohibited basis such as race or national origin. Disparate impact occurs when a creditor employs facially neutral policies or practices that have an adverse effect or impact on a member of a protected class unless it meets a legitimate business need that cannot reasonably be achieved by means that are less disparate in their impact. Under the theory of disparate impact, the government or private litigant can bring claims based solely on statistics that suggest an otherwise neutral policy disparately affects protected classes. Unlike other illegal credit discrimination claims, disparate impact claims do not require the government or a private plaintiff to prove intent to discriminate.

The Supreme Court has recently held that disparate impact is a recognizable theory of recovery under the Federal Housing Act (FHA). See Texas Dept. of Housing and Community Affairs, et al., v. Inclusive Communities Project, Inc., et al., 576 U.S.___ (2015) (decided June 25, 2015). This ruling that disparate impact claims are cognizable under the FHA is not one in which disparate impact claims are cognizable under the ECOA because the ECOA's text differs in certain important respects from that of the FHA. However, a number of lower federal district courts have concluded that disparate impact claims can be brought under the ECOA. See Golden v. City of Columbus , 404 F.3d 950, 963 (6th Cir. 2005) (“Neither the Supreme Court nor this Court has previously decided whether disparate impact claims are permissible under ECOA. However, it appears that they are ' “) cert. denied , 126 U.S. 738 (2005). Footnote 11.

Moreover, the executive administration has recently established programs, such as the Affirmatively Furthering Fair Housing database compiled by the Department of Housing and Urban Development (HUD) with a stated purpose of obtaining data for use in disparate impact analysis. Additional databases are being compiled by the Department of Education's Civil Rights Data Collection project and the Federal Housing Finance Agency's National Mortgage Database Project among others. The information in these types of databases may make data more readily available for use by plaintiffs in asserting disparate impact cases against lenders. Due to these issues, lenders of all sizes need to focus more carefully than ever on their fair lending compliance.

Federal Circuit Courts Cannot Agree on Who Is Entitled to Bring an ECOA Action

The row over the interpretation of the ECOA and its implementation of Regulation B stems from the fact that if an application for credit qualifies for credit under the lender's standards of creditworthiness, the lender is prohibited from requiring the signature of an applicant's spouse on the credit instruments. Under the ECOA, only an “applicant” can bring a claim under the ECOA and the ECOA did not separately define who an “applicant” is for purposes of the statute. The Federal Reserve, in drafting revisions to Regulation B (which implemented the ECOA), went ahead and redefined “applicant” to include “guarantors.” Some courts have held that the term “applicant” was clear and that a guarantor is not an applicant because, under the plain language of the statute itself, a guarantor neither requests nor receives credit. Therefore, since the term “applicant” is not ambiguous, personal guarantors are not “applicants” and they cannot assert a cause of action under the ECOA. See Moran Foods v. Mid-Atlantic Market Development Co., LLC, 476 F.3d 436 (7th Cir. 2007). These courts have held that the Federal Reserve, in redefining “applicant” to include guarantors, expanded the relief provided by the ECOA beyond what Congress intended.

The Eighth Circuit, in Hawkins v. Community Bank of Raymore , 761 F.3d 937 (8th Cir. 2014), ruled that whatever wisdom the Federal Reserve exercised in expanding who could bring a claim under the ECOA, it was not a decision that the Federal Reserve could make. Congress limited a cause of action under the ECOA to an “aggrieved applicant,” the statute gave “applicant” its ordinary meaning and any decision to expand the liability of lenders and to provide a cause of action for guarantors must come from Congress.

In direct contrast to the Eighth Circuit's Hawkins decision, the U.S. Court of Appeals for the Sixth Circuit, in RL BB Acquisition, LLC v. Bridgemill Common , 754 F.3d 380 (6th Cir. 2014) (concurrence Judge Colloton), determined that the term “applicant” was ambiguous and that the Federal Reserve's definition, which included guarantors, was a permissible interpretation of an ambiguous statutory term. In doing so, the court ruled that a spousal guarantor can assert a cognizable claim under the ECOA. Thus, the stage was set for the Supreme Court to resolve the differences between the federal circuits on the issue of whether a spousal guarantor was an 'aggrieved applicant' for purposes of asserting a claim under the ECOA.

The Supreme Court has granted certiorari to the petitioners in the Eighth Circuit's Hawkins decision to resolve the split in the federal appeals courts on the issue of: 1) whether guarantors are unambiguously excluded from being an applicant under the ECOA because they have not applied for credit; and 2) whether the Federal Reserve had authority under the ECOA to issue regulations that included spousal guarantors as “applicants” under the ECOA.

What Remedies Does the Spousal Guarantor Have if the Lender Violated the ECOA?

Spousal guarantors facing a lawsuit by a lender for a breach of the underlying credit agreement may have a powerful and potentially effective defense by claiming that the lender violated the ECOA. Some courts have held that a spousal guarantor could avoid their spousal guaranty as a remedy for a lender's violation of the ECOA and Regulation B. In these cases, spousal guarantors assert as an affirmative defense that a lender's violation of the ECOA permits the spousal guarantor to avoid the guaranty, rendering it unenforceable. See, e.g., Integra Bank/Pittsburgh v. Freedom, 839 F. Supp. 326 (E.D. Penn. 1993) and Silverman v. Eastrich Multiple Investor Fund, L.P ., 51 F.3d 28 9 (3rd Cir. 1995).

Other courts have ruled that a violation of the ECOA and Regulation B does not void the spousal guaranty because the ECOA does not contain express language that permits voiding the underlying guaranty obligations as a remedy for an ECOA violation. See, e.g., CMF Virginia Land, L.P. v. Brinson , 806 F. Supp 90 (E.D. VA 1992) and Diamond v. Union Bank and Trust of Bartlesville , 776 F. Supp. 542 (N.D. Okla. 1991). These courts have held that an ECOA violation must be brought as a compulsory counterclaim instead of an affirmative defense. A counterclaim requirement forces the spousal guarantor to pursue a claim for violation of the ECOA in a separate action from the creditor's claim on the spousal guaranty. This is strategically meaningful for the creditor since a creditor may be able to obtain judgment on a spousal guaranty prior to the resolution of the ECOA counterclaim.

Although the Supreme Court decided to hear the Hawkins appeal, the precise issue of whether a spousal guarantor may avoid his or her guaranty was not directly addressed in the Eighth Circuit's Hawkins decision. However, the Sixth Circuit's RL BB Acquisition decision did expressly rule that Regulation B could be asserted as an affirmative defense by the spousal guarantor. Therefore, it is unknown whether the Supreme Court will resolve the conflict in the lower courts concerning whether a spousal guarantor is entitled to avoid their guaranty as a remedy for a creditor's violation of the ECOA. It is this author's hope that the Supreme Court will address this issue, as the uncertainty of the remedy for an ECOA violation as it relates to spousal guaranties creates or prolongs litigation and injects uncertainty into creditors' underwriting decisions.

One potentially interesting tie in with the spousal guarantor issues is the recent Supreme Court's recent decision in Obergefell v. Hodges regarding same-sex marriage. Lenders should update policies and forms to ensure that their internal compliance and education extends to same-sex spouse situations. Although the issue has not been addressed by any court that the author has identified, a lender would be wise to ensure that its lending practices recognize this change in the legal landscape as to who may qualify as a spouse for purposes of the ECOA.

Practice Pointers for Spousal Guaranties Under the ECOA and Regulation B

Spousal guaranties are going to be in the legal spotlight during the Supreme Court's next term, and there are a number of steps a prudent lender can take now to minimize the potential for costly litigation and regulatory enforcement actions over ECOA violations. Lenders would be well served to adopt policies and procedures to ensure compliance with the ECOA and Regulation B, and properly educate sales persons and loan officers as to those requirements. Those policies and procedures should clearly identify the circumstances under which a lender may request a spouse's signature for equipment financing and security documents.

Lenders should also implement and thoroughly document their creditworthiness guidelines, which should be clear, objective and neutral in terms of protected classes. Lenders should also take the time to identify all “form” equipment financing documentation currently used by loan officers, such as a loan applications and credit applications, and confirm that those forms are neutral as to protected classes and that any “form” requirements for spousal information and guaranties are eliminated.

To the extent that a spousal guaranty is permissible, creditors should carefully document the basis for the spousal guaranty and how it was obtained including: 1) that a spousal guaranty was offered voluntarily and document such fact by a written acknowledgement that the guaranty was voluntary given and not required; 2) that no other guarantor was willing to provide a guaranty acceptable to the lender; 3) that the initial application submitted to the lender was for joint credit of both spouses; 4) use of gender-neutral application forms and underwriting guidelines; 5) under state law, the collateral to secure the indebtedness required the signature of both spouses to create a valid and enforceable lien or that the applicant needed collateral jointly owned by both spouses in order to be creditworthy under the lender's credit guidelines; 6) that the applicant alone did not satisfy the lender's standards of creditworthiness and the reasons why; 7) that the submission of a joint financial statement or other evidence of jointly held assets should not automatically considered to be a joint application for credit; and 8) that both spouses were advised of their rights under the ECOA.

Dennis A. Dressler is a member of Dressler Peters, LLC, a Chicago-based law firm that represents banks and equipment finance companies. A member of this newsletter's Board of Editors, Dressler can be contacted at [email protected]. The author gratefully acknowledges the assistance of summer associate Robert Laverty in the preparation of this article.