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Supreme Court to Resolve ECOA Dispute

March 6, 2015 Leave a comment

The ECOA is a federal law,15 U.S.C. § 1601 et seq., that prevents banks and other creditors from discriminating against people for pretty much the same reasons that employers are prohibited from discriminating against employees.  The ECOA provides 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 or marital status, or age ….”  15 U.S.C. § 1601(a)(1).

Regulation B permits federal agencies to make rules related to ECOA.  The Federal Reserve Board initially made such rules, pursuant to 12 CFR 202.1 et seq.  Since 2012, the new Consumer Financial Protection Bureau (CFPB) has made such rules, pursuant to 12 CFR 1002.1 et seq.  A creditor that fails to comply with these rules can face examination and enforcement from its primary regulator (e.g., FDIC, FRB, NCUA, OCC, CFPB, etc.).

Historically, a great deal of private litigation related to ECOA has been about allegations that a creditor discriminated against women due to their marital status (e.g., by preventing married women from obtaining credit on their own without having their husbands act as co-signers).  More recently, private litigation has asked whether women who agree to co-sign their husbands’ applications for credit can avoid paying those loans due to an alleged ECOA violation.  The Supreme Court will be hearing argument on this issue this fall, in Hawkins v. Community Bank of Raymore (cert. granted March 2, 2015).  The Court will be resolving a disagreement, or split, between the Sixth and Eighth Circuit Courts of Appeals on this issue.  The question is whether women who co-sign their husbands’ applications for credit (and, by doing so, become personal guarantors on the loan) are “applicants” and therefore protected by ECOA.

    The Eighth Circuit addressed this question in Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937 (8th Cir. 2014), which is the case that will be heard by the Supreme Court on appeal.  This case arose out of loans that banks made to corporations run by married men.  The banks required the men to personally guarantee the loans (i.e., if the corporations defaulted, the bank could sue the owners for the debt).  To prevent the men from giving all of their property to their wives (which would mean that there was nothing for the bank to collect), the banks also required the mens’ wives to co-sign these loan guarantees.

The corporations defaulted; the banks sued the owners and their wives for the debt; and the wives raised ECOA as an affirmative defense (i.e., they argued that by making them co-sign on their husbands’ corporate loans, and then suing them, the banks were discriminating against them, which is prohibited under ECOA, such that the wives’ guarantees should be void and the suits dismissed).  The trial court granted summary judgment to the bank, and the Eighth Circuit affirmed.  The reason was this:  ECOA prohibits discrimination against credit “applicants,” 15 U.S.C. § 1691(a), and the agencies have defined “applicants” to include guarantors.  See 12 CFR 202.2(e); 12 CFR 1002.2(e).  The Eighth Circuit rejected that definition:  “A guarantor engages in different conduct, receives different benefits, and exposes herself to different legal consequences than does a credit applicant.”  761 F.3d at 942.  This meant that the guarantor-wives were not “applicants” and that they were therefore unprotected by ECOA (and unable to raise it as a defense).

     The Sixth Circuit reached a different result in BB Acquisition, LLC v. Bridgemill Commons Dev. Group, LLC, 754 F.3d 380 (6th Cir. 2014).  This case involved another real estate loan guarantee executed by the wife of a real estate developer, and her attempt to raise ECOA as a defense to the bank’s collection of the debt she helped guarantee.  The trial court found for the bank on this issue, but the Sixth Circuit reversed.  It held that the agency definition of “applicant” to include guarantors deserved deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  Specifically, the Sixth Circuit found that:  i) the text of ECOA was ambiguous on whether a guarantor was an “applicant” who was protected by the statute; and ii) the agency’s decision to include guarantors as protected applicants was reasonable.  The Sixth Circuit recognized that this decision had the potential to cause creditors to lose a significant sum, but stated that “We will not strike down a valid regulation to salvage bad underwriting.”  754 F.3d at 386.

The same issue also came up in RL REGI N.C., LLC v. Lighthouse Cove, LLC, 762 S.E.2d 188 (N.C. 2014).  Regions Bank lent roughly $4.2 million to real estate developers who defaulted.  The loans were guaranteed by the developers and their wives, whom the bank sued.  One of the wives asserted, as an affirmative defense, that her guarantee had been obtained in violation of ECOA.  The bank’s position was that it asked each spouse to sign, and he or she did sign, a waiver of all defenses including any ECOA defense.  This raised the question of whether a person could waive her ECOA rights.  A jury found for the wife at trial; the trial court entered judgment for her; and the intermediate appellate court affirmed; but the North Carolina Supreme Court reversed.  “There is nothing facially illegal about this loan relationship in which a lender provided a loan upon certain conditions; moreover, parties routinely forego claims in settlement agreements.”  762 S.E.2d at 191.

So, interesting question.  It will be interesting to see which position the Supreme Court takes.

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