Bryan Cave Leighton Paisner Banking Blog

Bank Bryan Cave

Equal Credit Opportunity Act

Main Content

Divided Supreme Court Results in Non-Uniform Application of Reg B

In what goes for kicking the can down the road at the Supreme Court, the Court has evenly split on an appeal arising from the Eight Circuit Court of Appeals decision in Hawkins v. Community Bank of Raymore, 761 F3d 937 (CA8 2014) where that court found that the Federal Reserve had overstepped its bounds in adopting rules under the Equal Credit Opportunity Act to protect spousal guarantors. The case arose out of a series of loans in 2005 and 2008 made by the Bank—totaling more than $2,000,000—to PHC Development, LLC to fund the development of a residential subdivision. In connection with each loan and each modification, the principals of the LLC and their spouses (who had no interest in the LLC) executed personal guaranties in favor of Community to secure the loans.

The spouses defended themselves in an action brought by the bank on the basis that Community had required them to execute the guaranties solely because they were married to their respective husbands. They claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA.. the federal district court concluded that the spouses were not “applicants” within the meaning of the ECOA and thus that Bank had not violated the ECOA by requiring them to execute the guaranties. Accordingly, the district court granted summary judgment in favor of the Bank on the ECOA claim and on the ECOA-based affirmative defense to the Bank’s breach-of-guaranty counterclaims.

Read More

US Supreme Court to Review ECOA Spousal Guaranty Rules

The US Supreme Court has agreed to review a decision by the Eight Circuit Court of Appeals in Hawkins v. Community Bank of Raymore, 761 F3d 937 (CA8 2014) where the court found that the Federal Reserve  had overstepped its bounds in adopting rules under the Equal Credit Opportunity Act to protect spousal guarantors. The case arose out of a series of loans in 2005 and 2008 made by the Bank—totaling more than $2,000,000—to PHC Development, LLC to fund the development of a residential subdivision. In connection with each loan and each modification, the principals of the LLC and their spouses (who had no interest in the LLC) executed personal guaranties in favor of Community to secure the loans.

In April 2012, Community declared the loans to be in default, accelerated the loans, and demanded payment both from PHC and from the guarantors. The guarantors defended on the basis that Community had required them to execute the guaranties solely because they were married to their respective husbands. They claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA. The Federal Reserve has adopted Regulation B which prohibits a lender from requiring a person’s spouse to join in on any credit documents unless the parties are applying for joint credit. 12 CFR 202(d)(1).

The 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).

Read More

Reminder: Credit Practices Cannot be Based on Marital Status

A recent opinion by the Fourth Circuit Court of Appeals is a good reminder that lenders and lending lawyers must be aware of Regulation B’s limitations on requiring spousal guarantees when underwriting and documenting commercial loan transactions. Regulation B implements the Equal Credit Opportunity Act and, among other things, prohibits creditors from using credit approval and underwriting practices that discriminate on the basis of marital status.

On October 30, 2013, the Fourth Circuit, in Ballard vs. Bank of America, upheld the lower court’s dismissal of a wife’s claims against the bank. The opinion provides a detailed discussion of Regulation B’s requirements and, in dicta, suggests that the bank may very well have violated Regulation B in requiring the wife, Mrs. Ballard, to guaranty a loan to her husband’s business. The court, however, finds the dismissal was proper because Mrs. Ballard waived her claims against the bank.

After the loan was originally made, defaults occurred and the borrower and guarantors waived and released claims against the bank in connection with restructuring agreements. The court found those subsequent waivers and releases were sufficient to waive any claims Mrs. Ballard may have had against the bank for violating Regulation B. This is an interesting (and some may say unfair) conclusion because the only reason Mrs. Ballard had signed the release is because she was a guarantor. Had the bank not required the guaranty in the first place (a supposed violation of Regulation B), Mrs. Ballard would not have been included in the release agreement. Nevertheless, the court did not agree that the initial violation which started the chain of events prevented the release from being effective.

Read More
The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.