The U.S. Supreme Court stirred up quite a bit of confusion for lenders concerning the Equal Credit Opportunity Act. Whether or not guarantors are considered applicants under the Equal Credit Opportunity Act and Reg. B has traditionally depended on which court’s jurisdiction the guarantor resides in. Having different rules in each jurisdiction made it harder for lenders to determine if guarantors are applicants or not. Lenders hoped the tug-of-war could be settled once and for all.
Taking it to Court
Hawkins v. Community Bank of Raymore first brought this issue to the attention of the courts. On one end of the rope, we have a loan default by a real estate developer during the height of the most recent recession. On the other end, four guarantors (two husbands and two wives), secured the loan. After default, the lender accelerated the loan and demanded payment from the borrower and guarantors. The two guarantors’ wives preemptively filed a lawsuit declaring their guaranties were void and unenforceable under Reg. B.
The district court found the guarantors were not applicants under ECOA and granted summary judgment in favor of the bank. On appeal, the Eighth Circuit Court agreed, which put it at odds with numerous other state supreme courts and the Sixth Circuit Court, which found that guarantors are applicants under ECOA and Reg. B.
When the U.S. Supreme Court decided to hear the case, many lenders were excited, believing the matter might be resolved once and for all. Unfortunately, the decision didn’t quite settle things as much as those lenders had hoped. Because of the untimely death of Supreme Court Justice Scalia, the court has been left with an even number of justices, creating the potential for a tie. And that’s what happened here.
Ties are considered to go to the runner. So the Supreme Court essentially reaffirmed the position of the Eighth Circuit Court—that guarantors are not applicants within the meaning of ECOA.
Tug-of-War Standstill: Now What?
Until the Supreme Court agrees to hear the issue again and resolve the matter once and for all, then the question of whether or not a guarantor is an application will continue to come down to a matter of jurisdiction. The Supreme Court’s decision leaves the “spouse as an applicant” issue unanswered on a national level.
The guidance on how lenders should proceed from here includes:
- Lenders need to carefully think through potential spousal guaranty claims and defenses when making their underwriting decisions.
- Lenders should take into account which jurisdiction they are subject to.
- Lenders should always consider is the role of the guarantor within the entity and the materiality of that involvement.
- Moreover, lenders need to consider state law as it relates to guarantors.
These adages are not new and do not provide a perfect solution, but they are the best we have at this time. In other words, keep tuggin’!
Ken Agle, President of AdvisX, our sister company, brings more than 25 years of experience covering almost all facets of financial institution risk management operations. He has conducted more than 350 compliance reviews and has assisted more than 200 financial institutions throughout the United States. He has developed and implemented systems and training programs on all phases of banking risk management, including, but not limited to BSA/AML, fair lending, loan review, HMDA, CRA, BSA, operational compliance, TILA, and RESPA. He has written numerous regulatory responses and appeals and has been instrumental in assisting institutions with challenging circumstances while facing regulatory enforcement orders. He has partnered with McGladrey & Pullen, RSMI, Promontory, Sheshunoff and other multi-region firms to provide support services to financial institutions. Mr. Agle specializes in strategic regulatory response and in developing and implementing both proactive and reactive tools and systems to preempt and resolve issues affecting today’s financial institution. For more information on BSA/AML services, contact Ken Agle.