HCMP attorneys Mike Kot and Brian Free provide insight into the recent U.S. Supreme Court 4-4 opinion regarding the Equal Credit Opportunity Act (“ECOA”) as it relates to spousal guaranties, Hawkins v. Cmty. Bank of Raymore, 136 S.Ct. 1072, 2016 WL 1092416 (2016). As lenders well know, this federal anti-discrimination legislation, as interpreted under Regulation B, has created uncertainty regarding the ability to obtain and enforce spousal guaranties in commercial loan transactions, especially in community property states. The peculiar nature of this equally-divided U.S. Supreme Court opinion creates ambiguity that would be helpful to clarify as lenders continue to address spousal guaranties and their unique regulatory hurdles.
ECOA Background: ECOA makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” 15 U.S.C. § 1691(a). The purpose of this provision of ECOA was “to eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit.” Anderson v. United Fin. Co., 666 F.2d 1274, 1277 (9th Cir. 1982). To claim the protections of ECOA, a claimant must be an “applicant,” which is defined 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.” 15 U.S.C. § 1691a(b). This definition was interpreted by the Federal Reserve Bank, through its adoption of Regulation B, to include guarantors as applicants under ECOA. 12 C.F.R. 202.2(e). Regulation B has been particularly problematic for high-net worth individuals with jointly-held assets guaranteeing commercial loans. For example, lenders may be found liable for violating ECOA, or subject to regulatory oversight, for requiring spouses to execute personal guarantees, even when assets are presented jointly on financial statements, which can result in liability for damages and invalidation of certain loan documents.
8th Circuit Precedent Under Hawkins: In the decision that was ultimately reviewed by the Supreme Court, the 8th Circuit ruled in Hawkins v. Community Bank of Raymore that “a person does not qualify as an applicant under the statute [ECOA] solely by virtue of executing a guaranty to secure the debt of another.” 791 F.3d 937, 941 (2014). A lender in the 8th Circuit, therefore, does “not violate the ECOA by requiring [spouses] to execute the guaranties.” Id. at 943. But other Circuits, including the 6th Circuit, interpret “applicant” to include a guarantor. The 9th Circuit has not considered the issue of whether “applicant” includes a guarantor, so this issue remains unresolved in Washington, Oregon, Idaho, California, Nevada, Utah, Arizona, Alaska, Hawaii, and Montana (the states located in the 9th Circuit).
Impact of an Equally Divided Opinion: The Supreme Court reviewed the 8th Circuit’s Hawkins decision with only 8 Justices sitting because of Justice Scalia’s passing. The Court issued a one-sentence opinion stating only that “[t]he judgment is affirmed by an equally divided Court.” An affirmance by an equally-divided Court carries no precedential weight, but does leave the lower court’s decision as the controlling law for its jurisdiction. Thus, although Hawkins remains controlling precedent for the 8th Circuit, the Supreme Court’s opinion does not help clarify the law for the states in other federal judicial circuits, including those on the west coast.
In light of the Supreme Court’s divided-opinion, we share the following observations:
- Whether spousal guarantors are protected by Reg. B of ECOA remains an open question in the 9th Circuit.
- Even in the 8th Circuit, it is possible that spousal guarantors may nevertheless find protection under ECOA. The 8th Circuit limited the scope of its ruling in several ways, including an observation that guarantors might be protected by ECOA if a particular guarantor had more involvement in the loan, such as participating in the loan-application process or having an interest in the borrower-entity, making the guarantor seem more in the nature of an “applicant”.
- Lenders should continue to utilize strong underwriting processes to ensure that guarantors are not well-positioned to later bring claims under Reg. B of ECOA to invalidate loan guaranties. For example, lenders should continue to obtain financial statements with clear descriptions of how assets are legally held (marital community, separate property, tenant-in-common, etc.) and offer alternative credit enhancements to spousal guaranties so that guarantors may elect to provide a spousal guaranty or an alternative credit enhancement (so that a spousal guaranty is not deemed required by lender).
- This issue may end up back before the Supreme Court when it has a full nine-Justice panel, which could provide a final determination of the law across the country.