The U.S. Supreme Court recently split 4-4 in Hawkins v. Community Bank of Raymore, leaving unsettled the question of the enforceability of the “spousal guaranty” rule under federal Regulation B, and for now letting the outcome depend on where the dispute arises. The Hawkins case involved loan guaranties given by two women, Valerie Hawkins and Janice Patterson. The guaranties covered loans to a company owned 50/50 by the women’s husbands but in which the women themselves had no ownership interest. Hawkins and Patterson alleged that the Community Bank of Raymore required both of them to execute the guaranties simply because they were married to their husbands in order for the bank to extend credit to their husbands’ company. Lenders often want a business owner’s spouse to guaranty a loan to the business along with the business owner because the business owner and spouse often hold their assets jointly and have submitted a joint financial statement, so the lender cannot evaluate the business owner’s creditworthiness as a guarantor in isolation from the spouse. In addition, some lenders worry about a business owner’s potential for transferring assets to a non-guarantor spouse after closing. However, Federal Regulation B prohibits requiring anyone to guaranty a loan simply because the guarantor is married to another guarantor, borrower or borrower principal. The regulation’s prohibition is based on the view that a guarantor is an “applicant” protected under the federal Equal Credit Opportunity Act and that requiring a guaranty simply because of marital status is prohibited sex discrimination.
The effect of the high court’s 4-4 split in this case is that the 8th Circuit opinion stands. The 8th Circuit had held that “the plain language of the ECOA unmistakably provides that a person is an applicant only if [it] requests credit.” Hawkins v. Community Bank of Raymore, 761 F.3d 937, 941 (8th Cir. 2014). Accordingly, the 8th Circuit found that the Regulation is not applicable to guaranties. The 8th Circuit’s holding directly conflicts with federal court holdings in the 4th and 6th Circuits, as well as state court holdings in Alaska, Iowa, Missouri and Virginia. There, courts have held that the ECOA is ambiguous as to who qualifies as an “applicant” and thus, Regulation B’s extension to guarantors is a permissible action by the federal banking regulators.
This outcome, made possible by Justice Scalia’s untimely death, is unsatisfactory for just about everyone (except, presumably, for Ms Hawkins and Ms Patterson!). For borrowers and guarantors who hoped to lock in Supreme Court support for this regulatory protection, things are no better than before the court accepted certiorari in this case. For lenders who hoped to push back one small regulatory burden, the case represents no progress either. Ironically, and perhaps explaining why it’s taken so long for this issue to reach the high court, lenders and spousal guarantors who understand Regulation B have been able to accomplish their business objectives for years without a problem. A careful lender will either ask the business principal to provide an individual financial statement to permit the lender to evaluate the business principal’s individual creditworthiness as a guarantor or make it clear to the parties that, while a creditworthy guarantor is required and the spouse would be an acceptable guarantor, the lender is not requiring that the spouse in particular serve in that role, though that will often be the resulting outcome. Since the spousal guaranty rule remains in place, at least outside the 8th Circuit, careful lenders may want to revisit their spousal guaranty procedures to assure these or similar steps are taken to minimize compliance risk. Unless, of course, there’s a lender out there who wants to take this issue all the way back to the Supreme Court at a time when it contains an odd number of justices.
