By: Jon Sacks and Heather S. Nason
When a closely-held entity applies for a loan, the financial institution usually requires the entity’s owner(s) to guaranty the loan. If the owner is married, the financial institution may also require the owner(s) spouse(s) to guaranty to improve the likelihood that loan will be repaid if the borrower defaults. This seems like a logical credit request when structuring a loan since spouses often hold jointly owned assets.
The Equal Credit Opportunity Act (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.” The ECOA defines “applicant” in part as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit”. Under the ECOA’s implementing Regulation B, the Federal Reserve Board (now under the Consumer Financial Protection Bureau) the term “applicant” is defined to include guarantors. Regulation B contains a provision that is sometimes referred to as the “spouse-guarantor rule,” which prohibits a creditor from requiring an applicant’s spouse to guarantee a credit instrument.
Is a spouse-guarantor an “applicant” for credit for purposes of asserting protections under the ECOA? This issue was recently addressed by two federal appeals courts, resulting in two different conclusions.
Sixth Circuit
In June 2014, the Sixth Circuit Court of Appeals said that a spouse-guarantor was an applicant and therefore was protected under the ECOA. In RL BB Acquisition LLC v. Bridgemill Commons Development Group, LLC , a real estate development company and its owner sought to refinance certain loans. When the bank informed the real estate development and its owner that it would not approve the refinancing, the owner sought additional collateral. The owner then agreed to pledge certain other assets to secure the loan and the owner’s spouse agreed to pledge certain of her assets that she individually owned. Under the bank’s underwriting policies, the bank then determined that it could issue the loan and the owner’s spouse executed a guaranty. The borrower defaulted at maturity and the lender sued, including a count against the spouse-guarantor. The spouse-guarantor answered, claiming that her guaranty that she was required to sign was unenforceable since it violated the ECOA and Regulation B – specifically, Regulation B’s prohibition on requiring spouses to guarantee loans. The district court held that the spouse-guarantor could not raise violations of ECOA and Regulation B as an affirmative defense. The spouse-guarantor appealed and the Sixth Circuit reversed the district court.
