Each year the Supreme Court must decide what issues they will address by determining what cases will be granted a writ of certiorari. One of the three compelling reasons for granting a writ of certiorari is a circuit split, which occurs when two or more circuits in the U.S. court of appeals system have entered conflicting decisions on the same important matter or have different interpretations of the same federal law. This year is no different, as the Supreme Court recently agreed to review the split between the Sixth and Eighth Circuit over the issue of whether the Equal Credit Opportunity Act (ECOA) applies to loan guarantors. That is, the Court will determine whether a spouse-guarantor can assert a claim of discrimination under the ECOA.
The Equal Credit Opportunity Act
For over 40 years the ECOA has prohibited financial institutions and lenders from discriminating against applicants for credit on various proscribed bases, including gender and marital status. The ECOA has been a powerful tool in the fight for women’s rights, especially married women who were traditionally denied individual credit or offered credit on less favorable terms. However, in recent years there has been uncertainty as to the scope of the ECOA with respect to spousal-guarantors.
The ECOA specifically provides that it is “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of… sex or marital status.” 15 U.S.C. § 1691(a)(1). It is the term “applicant” which has caused the uproar. 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.” 15 U.S.C. § 1691a(b). However, the Federal Reserve Board’s Regulation B, which implements the ECOA, has its own – broader – interpretation of “applicant.” (It should be noted that the Dodd-Frank Act transferred ECOA administration, including Regulation B, from the Federal Reserve Board to the Consumer Financial Protection Bureau in 2010.) 12 U.S.C. § 5581(b).
Originally, the Federal Reserve Board (FRB) implemented administrative regulations regarding the ECOA that defined an “applicant” under Regulation B as “any person who requests or has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit other than a guarantor, surety, endorser or similar party.” 12 C.F.R. § 202.2(e) (1974). Then, in 1985 the definition was radically changed to “any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit . . . includ[ing] guarantors, sureties, endorsers and similar parties.” 12 C.F.R. § 202.2(e). However, courts may not necessarily be required to follow this expanded definition.
The Chevron Deference
In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 1984, the Supreme Court provided the legal test for determining whether to grant deference to a government agency’s interpretation of a statue which it implements and administers (such as the FRB’s Regulation B here). According to the Court, there is a two-part analysis when determining whether a court should defer to an agency’s construction of the statute. As Justice Stevens explained:
First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute . . . Rather, if the statute is silent or ambiguous with respect to the specific issue, the [second] question for the court is whether the agency’s answer is based on a permissible construction of the statute. Chevron, pg 842-43.
This two-step analytical framework (a.k.a., the Chevron deference) can be applied here. Thus, a court can either find the statutory language of the ECOA to be unambiguous, and therefore not apply to “guarantors,” or a court can determine that the statutory language of the ECOA is ambiguous, and therefore defer to Regulation B – if it finds FRB’s interpretation permissible – by including “guarantors” within the definition of “applicants.” However, prior to 2014, circuit courts, including the First (Mayes v. Chrysler Credit Corp., 1999), Third (Silverman v. Eastrich Multiple Investor Fund, L.P., 1995), and Fourth Circuits (Ballard v. Bank of America, 2013), essentially applied Regulation B’s expanded definition axiomatically, treating guarantors as applicants without even considering agency deference.
Indeed, prior to 2014, the Seventh Circuit was the only circuit court to question the FRB’s interpretation. In that case, Moran Foods, Inc. v. Mid-Atlantic Market Development Co., LLC, 2007, Judge Posner wrote for the unanimous court of appeals and previewed the coming contention. According to Judge Posner, the defendant/appellee “was not an applicant for credit, and neither received nor was denied it.” Thus, after noting that the Federal Reserve Board included “guarantor” within its definition of “applicant” for credit, Judge Posner went on to explain why the court “doubt[s] that the statue can be stretched far enough to allow this interpretation,” by concluding that while “[i]t is true that courts defer to administrative interpretations of statutes when a statute is ambiguous, and this precept applies to the Federal Reserve Board’s interpretation of ambiguous provisions of the Equal Credit Opportunity Act… there is nothing ambiguous about ‘applicant’ and no way to confuse an applicant with a guarantor.”
Although Judge Posner ultimately found that even if Regulation B’s definition did apply, the defendant/appellee had failed to prove discrimination under the ECOA, his reasoning influenced several courts (Champion Bank v. Regional Development, LLC, et al., 2009; Arvest Bank v. Raju v. Uppalapti, et al., 2013; and Smithville 169 v. Citizens Bank & Trust Co., 2013) and seemed to foretell the coming clash.
The Circuit Split
In late 2014, two circuit courts were asked to determine the correct definition of “applicant” under the ECOA, and, thus, applied the Chevron deference. Each circuit interpreted the ECOA’s statutory language differently, leading to the current circuit split.
In RL BB Acquisition v. Bridgemill Commons Development Group, LLC, et al., decided June 12, 2014, the Sixth Circuit found the ECOA’s definition of “applicant” to be ambiguous “because it could be read to include third parties who do not initiate an application for credit, and who do no seek credit for themselves-a category that includes guarantors.” The court based this conclusion on two broad terms, “applies” and “credit.” According to the Sixth Circuit, a guarantor formally approaches, or “applies” to, “a creditor in the sense that the guarantor offers up her own personal liability… if the borrower defaults.” Additionally, the court found that because the statute uses the word “debtor” – as opposed to “applicant” – when defining “credit,” the statute differentiates between applicant and debtor, and thus an applicant could be a third-party guarantor. The court also agreed with the FRB’s reasoning for the 1985 amendment to expand the definition of “applicant.” Thus, based on the textual ambiguities noted above, and the FRB’s reasoning, the court deferred to Regulation B’s interpretation.
Then on August 5, 2014, in Hawkins v. Community Bank of Raymore the Eighth Circuit completely disagreed with the Sixth Circuit, finding the statutory definition to be unambiguous, and concluding that “the text of the ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of excuting a guaranty to secure the debt of another.” According to the court, “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.” The court further explained that a guaranty is “collateral and secondary to the underlying loan transaction,” and thus, “while a guarantor no doubt desires for a lender to extend credit to a borrower, it does not follow from the execution of a guaranty that a guarantor has requested credit or otherwise been involved in applying for credit.” In so holding, the Eighth Circuit acknowledged the Sixth Circuit’s recent decision in RL BB Acquisition, but determined that when the Sixth Circuit acknowledged that “a guarantor does not traditionally approach a creditor herself for credit… a guarantor is a third party t the larger application process… this ends the inquiry because it demonstrates that a guarantor unambiguously does not request credit.” The Eighth Circuit also noted that “[w]e find it to be unambiguous that assuming a secondary, contingent liability does not amount to a request for credit. A guarantor engages in different conduct, receives different benefits, and exposes herself to different legal consequences than does a credit applicant.”
The decision in Hawkins not only created a circuit split on the scope of the ECOA with regard to spousal guarantors, it also more generally raised the important question of the degree of judicial deference the FRB, and other federal agencies, can expect as they continue to move forward with their increasingly broad interpretations of various fair lending laws. Thus, when the plaintiffs in Hawkins petitioned the Supreme Court for a writ of certiorari, the Court, likely recognizing these important issues created by this circuit split, granted certiorari on March 2, 2015. The case will be reviewed by the Court in the next term starting October 2015.
Until the Supreme Court Weighs In, What Can Lenders Do to Protect Themselves?
Because the Supreme Court will not be addressing this issue until the October 2015 term, there are several precautions available to lenders until then that can minimize the risks of an ECOA claim. First, during the underwriting process, it should be clear – and it should be documented – that the lender is not requiring the signature of a spouse; rather the lender is merely requiring the signature of another person as a guarantor. Second, lenders should consider requiring ECOA specific underwriting forms and disclaimers that are signed by the borrower and guarantors as part of the initial loan package. Third, a guarantor waiver of ECOA claims – which both the Fourth Circuit (in Ballard v. Bank of America, 2013) and the North Carolina Supreme Court (RL Regi North Carolina, LLC v. Lighthouse Cove, LLC, 2014) have found enforceable – should be considered by lenders. Fourth, every commercial loan modification needs to include broad waiver and release language. Finally, most of the risk associated with ECOA claims can be dealt with by developing well-written forms and practicing good recordkeeping.
In my view, the Eighth Circuit correctly applied the Chevron analysis, while the Sixth Circuit simply asked the wrong question. In RL BB Acquisitions, the Sixth Circuit asked whether the statutory definition of “applicant unambiguously excludes guarantors.” But it is not whether the definition excludes the term; rather, it is whether the statute is ambiguous enough to require the administrative agency to offer a clarification. As Judge Perry stated in Champion Bank in 2009, “[a] guarantor is not an applicant because a guarantor does not, by definition, apply for anything. Moreover, a guarantor cannot be denied credit for which he or she did not apply, and thus it is difficult to conceive how a guarantor can claim to have been discriminated against.”
Additionally, Judge Posner expressed his concerns regarding the liability a broad definition imposed. According to Judge Posner, “to interpret ‘applicant’ as embracing ‘guarantor’ opens vistas of liability that the Congress that enacted the [ECOA] would have been unlikely to accept.” However, not only does it seem to open new doors for liability, it also certainly seems ironic that those claiming discrimination are not being denied or excluded; rather they are being included in the lending process. As explained in Hawkins:
These policies focus on ensuring fair access to credit by preventing lenders from excluding borrowers from the credit market based on the borrowers’ marital status. But the considerations are different in the case of a guarantor. By requesting the execution of a guaranty, a lender does not thereby exclude the guarantor from the lending process or deny the guarantor access to credit. Here, Hawkins and Patterson do not claim that they were excluded from the lending process due to their marital status. Indeed, they complain that they were improperly included in that process by being required to execute guaranties. Thus, we believe that the purposes and policies of the ECOA buttress our interpretation of the statute’s plain meaning.*
Thus, even if the term ‘applicant’ was ambiguous, Regulation B’s interpretation leads to illogical results, and is an arguably unreasonable and impermissible agency extension of the ECOA based on the construction of the statute. However, we will ultimately have to wait for the Supreme Court’s decision in Hawkins.
*Furthermore, as both Judge Posner and the Hawkins court point out, requesting a husband and wife to execute guaranties for a loan provided to a company owned by one of the spouses may simply be “sound commercial practice unrelated to any stereotypical view of a wife’s role” because such a practice would then allow the financial institution to execute on any marital property in the event of a default on the underlying loan. This is especially true in certain jurisdictions, depending on the law, such as Missouri’s co-ownership law, which creates a presumption of tenancy by the entirety for property owned by a husband and wife.