An equally divided U.S. Supreme Court has affirmed the Eighth Circuit's decision in Hawkins v. Community Bank of Raymore, which upheld a federal district court ruling that the Equal Credit Opportunity Act (ECOA) does not provide a cause of action to loan guarantors. The Supreme Court's one-sentence per curiam opinion does not reveal how individual justices voted.

The affirmance by a 4-4 vote means that the Eighth Circuit's ruling has no precedential effect in any other circuit. According to observers, Justice Scalia, who participated in the oral argument, was skeptical of the plaintiffs' ECOA interpretation. Hawkins therefore likely is the first Supreme Court decision illustrating the negative impact of Justice Scalia's passing that was feared by industry.

The ECOA defines an ''applicant'' as someone who ''applies to a creditor directly for an extension … of credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.'' The plaintiffs claimed that by requiring them to guarantee loans made by the bank to a company their husbands controlled, the bank violated the ECOA provision that prohibits discrimination by a creditor against an ''applicant'' on the basis of marital status. The plaintiffs relied upon the Regulation B definition of an ''applicant,'' which the Federal Reserve Board amended in 1985 to include a guarantor '' [f]or purposes of section 202.7(d).'' Section 202.7(d) of Regulation B specifies when a creditor may require the signature of a spouse or other person.

The Eighth Circuit concluded 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.'' It also ruled that the Regulation B's definition of ''applicant,'' which includes a guarantor for purposes of the signature rules relating to an applicant's spouse, was not entitled to deference under the framework established by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council because the definition contradicted the text's unambiguous statutory definition. The Eighth Circuit also declined to follow the Sixth Circuit's contrary decision in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp. In a concurring opinion, Judge Colloton explained that the inclusion of guarantors in the Regulation B ''applicant'' definition was designed to give guarantors standing to sue as aggrieved applicants under the ECOA civil liability provision in the belief, ''that allowing guarantors to bring suit would have the effect of 'enhancing protections.'''

The Hawkins affirmance by a 4-4 vote also means that the Regulation B ''applicant'' definition remains binding outside of the Eighth Circuit. Except with respect to certain auto dealerships, the Dodd-Frank Act transferred the Federal Reserve Board's ECOA regulatory authority to the Consumer Financial Protection Bureau (CFPB). Despite submitting an amicus brief with the Solicitor General supporting the plaintiffs' position, the equally divided vote indicates that the CFPB could not convince a fifth justice to agree with its position. In its brief, the CFPB argued that the Regulation B definition of an ''applicant'' is consistent with the text of the statutory definition and serves the statutory purpose of protecting spouses from being required to execute guarantees based solely on marital status. The CFPB also argued that ''great deference'' to the Regulation B definition was appropriate.

The affirmance also deprives the Supreme Court of the opportunity to address an important question regarding statutory construction and the limits on the regulatory authority of administrative agencies. In addition to the question of whether spousal guarantors ''are unambiguously excluded'' from the ECOA's definition of an ''applicant,'' the Supreme Court's grant of certiorari in Hawkins included a second question, ''whether the Federal Reserve Board has authority under the ECOA to include by regulation spousal guarantors as 'applicants' to further the purposes of eliminating discrimination against married women.''

Had a majority of the Supreme Court concluded that the statutory definition of an ''applicant'' unambiguously excluded a guarantor from its scope, the Court would have considered the import of that determination with respect to the Federal Reserve Board's or the CFPB's authority to expand the scope of the ECOA under the guise of effectuating its purpose. One can imagine how Justice Scalia might have responded to the suggestion that either agency was free to effectuate the purpose of eliminating discrimination against married persons by defining spousal guarantors as ''applicants'' if Congress had unambiguously resolved the question of whether a guarantor was an ''applicant.''

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.


Copyright © 2016 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.