ECOA Gets More Teeth in North Carolina

more+
less-

In one of my prior “Drive Thrus” in Community Banking Exellence, I reminded everyone that lenders can never require a spousal guaranty, but can request one. The North Carolina Court of Appeals brought that fact home recently in RL Regi North Carolina, LLC v. Lighthouse Cove, LLC,…,and Connie S. Yow (COA12-1279), decided on August 20, 2013. The Court upheld a Superior Court decision concluding that Regions Bank had violated ECOA by requiring Connie S. Yow (“Mrs. Yow”) to sign a spousal guaranty. The result was she could use that violation as an affirmative defense precluding the enforcement of her guaranty. It is an expensive lesson, from which we all should learn.

The history of this commercial loan reads like many from the boom times in early 2006.  The borrowing entity wanted to purchase real estate to develop a subdivision in Brunswick County, North Carolina. Regions agreed to loan $4,280,000 for that end and set forth in the commitment that the principals and the spouses of the principals, including Mrs. Yow, would personally guarantee the loan. The loan was made and the parties properly executed the loan documents.

Now fast forward to 2009. The loan is in default and the parties execute a forbearance agreement, including Mrs. Yow as a guarantor. The borrower then promptly defaults on its obligations therein and Regions sells the Note. The new Note holder (the Plaintiff) then files an action to collect the debt, which resulted in counterclaims, etc. against the Plaintiff. (Did I not tell you it was a familiar story?)

It is during the trial court case that the story becomes more interesting and relevant. The court had previously dismissed all the claims against the Plaintiff and found in its favor except for its claim against Mrs. Yow. Following the trial on that issue, the jury found that Regions had required her to sign the guaranty in violation of ECOA and that this violation constituted an affirmative defense. In other words, the Plaintiff could not collect against Mrs. Yow since her guaranty was unenforceable.

The Equal Credit Opportunity Act (ECOA) is a federal statute that prohibits creditors (defined as anyone participating in credit decisions in the ordinary course of their business, including banks, retailers, credit unions and credit card issuers) from discriminating against anyone on the basis of that applicant’s race, color, religion, national origin, sex, marital status or age (if that person is old enough to legally enter into a contract). Regulation B codifies the rules implementing this restriction; 202.7(2) addresses spousal guaranties. It says in part that a creditor shall not require the signature of the applicant’s spouse if the applicant qualifies on his own, and if the applicant does not qualify, then the creditor may ask for an additional party to guaranty. Although the creditor may ask for that additional party to be the spouse, it cannot require it to be the spouse. If a bank fails to follow ECOA, the ramifications can be substantial.

In the case at hand, the jury found an ECOA violation. Specifically it found that Regions had not made a determination of the borrower’s creditworthiness and also had required Mrs. Yow’s personal guaranty. As previously mentioned, the trial court then allowed her to use that violation as an affirmative defense rendering her without liability under the guaranty that she had signed. The Court of Appeals in a well-written opinion found no trial court errors and ruled that in North Carolina, a violation of ECOA is an affirmative defense to that guaranty’s enforcement.

This case is a great reminder of some of the details of lending and credit administration, such as:

  1. Never, ever tell a potential borrower or guarantor the spouse is required to sign a guaranty as part of the loan. You can alert that it may be necessary to have additional guarantors after conducting a credit analysis, but never say it is a certainty.
  2. Do the separate credit analysis – go through the motions. Even if in your opinion it is a foregone conclusion that such a spousal guaranty will be necessary, or even if the borrower or guarantor offers up his spouse. Do the separate credit analysis before requiring or accepting a spousal guaranty. This will be good evidence of your compliance if there is a legal action to enforce that guaranty.
  3. Expect many more spouses or former spouses to claim ECOA violations as affirmative defenses, especially in North Carolina. We have seen a strong uptick in the past year. We now expect to see even more. It is a strong affirmative defense and one you need to be prepared to address.