Guarantors Are Not Protected by the Equal Credit Opportunity Act, Eighth Circuit Holds

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The U.S. Court of Appeals for the Eighth Circuit recently upheld summary judgment in favor of a lender, dismissing an action by the borrowers’ spouses alleging that the lender’s requirement that the spouses sign guaranties for the loan violated the Equal Credit Opportunity Act (ECOA). The court concluded that the spouses did not qualify as "applicants" under the ECOA.

Between 2005 and 2008, the lender made four loans to a limited liability company (LLC). In each instance, the two members of the LLC and their spouses executed personal guaranties in favor of the lender to secure the loans. In 2012, the LLC failed to make payments due under the loan agreements. The lender declared the loans to be in default, accelerated the loans, and demanded payment from both the LLC and the spouses as guarantors. The spouses then filed suit, claiming that the lender required them to execute the guaranties solely because they were married to the members of the LLC and that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA.

The ECOA makes it unlawful for a creditor to discriminate against any "applicant" in a credit transaction on the basis of marital status. The ECOA defines "applicant" as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit." The Federal Reserve Bank enacted regulations expanding the term "applicant" to include guarantors. Relying upon the Federal Reserve Bank’s interpretation, the spouses claimed that they qualified as "applicants."

The Eighth Circuit disagreed, refusing to defer to the Federal Reserve Bank’s interpretation. Under traditional rules of statutory construction, a court will consider an agency’s interpretation only if the court determines the statute is silent or ambiguous concerning the specific issue presented. The Eighth Circuit concluded that the ECOA was neither silent nor ambiguous. Instead, the court held that, based upon the text of the ECOA, it is clear that "a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another." The court further found that "the plain language of the ECOA unmistakably provides that a person is an applicant only if she requests credit. But a person does not, by executing a guaranty, request credit." Accordingly, because the court concluded that the spouses were not "applicants" under the ECOA, it held that the lender did not violate the ECOA by requiring the spouses to execute the guaranties.

The court noted, however, that the Sixth Circuit recently reached the opposite conclusion. The Sixth Circuit found it ambiguous whether a guarantor qualifies as an applicant under the ECOA and, therefore, followed the Federal Reserve Bank’s interpretation that an applicant includes a guarantor. This split in the circuits illustrates that whether a guarantor of a loan is protected by the ECOA is an issue that still appears to be developing.

Topics:  ECOA, Guarantors, Guaranty Claims, Lenders

Published In: Civil Rights Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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