As the Bard’s Juliet famously mused, “What’s in a name? That which we call a rose by any other name would smell as sweet.” One might similarly wonder at the U.S. Supreme Court’s decision yesterday (March 2, 2015) to grant certiorari in a case from the Eighth Circuit (Hawkins v. Community Bank of Raymore – August, 2014). After all, the Eighth Circuit’s opinion dealt with what many would consider a dry topic, i.e. whether a guarantor falls within the definition of an “applicant” under the Equal Credit Opportunity Act (“ECOA”). And yet, that question of a name can make all the difference between a successful guarantor claim and one in which (dare I say it?) the bloom is off the rose. 

The Facts

Two husbands owned 100% of the membership interests in a limited liability company (PHC). In 2005, PHC obtained a series of commercial loans to develop a residential subdivision. In connection with each loan, the husbands (along with their wives) executed personal guaranties in favor of the lender. When the loans went into default in 2012, the lender sued PHC and the guarantors. The wives filed a separate action against the lender seeking damages and a declaration that the guaranties were void / unenforceable in violation of ECOA. The district court ruled in favor of the lender and the Eighth Circuit affirmed.

The Law

ECOA was passed in 1974 to protect married women from credit discrimination, and specifically prohibits lending discrimination based upon marital status. Every commercial lender knows the three key basics of ECOA underwriting for guarantors:

Since the key inquiry in most ECOA guarantor litigation is how the non-owner spouse became a guarantor (i.e. did the bank require it or did the spouse volunteer?), you can see how this issue is prime for litigation once a loan goes bad and a guarantor does not want to pay.

And that’s where the importance of a name comes in. Congress wrote the statute so that only “applicants” have the right to bring claims for ECOA violations, including the right to sue for punitive damages and attorneys’ fees. Although the statutory definition of “applicant” does not mention guarantors, the CFPB issued a regulation which specifically included guarantors in the category of those able to sue as “applicants”.

The Eighth Circuit did not buy the CFPB’s interpretation and ruled that the agency had acted contrary to the plain language of the statute. In particular, the Eighth Circuit held that the wives were not “applicants” because as guarantors they had not “applied” for the loan, and therefore had no standing to sue under ECOA. Since the Sixth Circuit reached the exact opposite conclusion in a June 2014 opinion, the U.S. Supreme Court decided to hear the case to resolve the circuit split. (Note: Lower courts in the Fourth Circuit have followed the Sixth Circuit’s reasoning, although the Fourth Circuit has not directly addressed the issue).

The Morals

1. Watch to see what the Supremes do. This case may offer interesting insight on how much deference the Court is willing to give statutory interpretations issued by the CFPB.

2. Get ECOA waivers / releases. Both the Fourth Circuit and the NC Supreme Court have held that guarantor waivers of ECOA claims are enforceable. Lenders should ensure that EVERY commercial loan modification that they offer includes broad waiver and release language. If you wait until the loan is in special assets, it may already be too late.

3. Underwriting forms. Consider requiring ECOA specific underwriting forms / disclaimers signed by the borrower and guarantors as part of the initial loan package. Much of the risk of later ECOA claims can be minimized by good forms and recordkeeping.