The U.S. Supreme Court has agreed to review whether the Equal Credit Opportunity Act (ECOA) applies to loan guarantors. The case will be argued in the Supreme Court’s term that begins in October 2015.

In Hawkins v. Community Bank of Raymore (cert. granted March 2, 2015), the U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s ruling that the ECOA did not provide a cause of action to the plaintiffs who alleged that they were required to sign guaranties of several loans made by the bank to a company their husbands controlled. The plaintiffs claimed that by requiring the guaranties, the bank violated the ECOA provision that prohibits discrimination by a creditor against an “applicant” on the basis of marital status.

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.” Rejecting the plaintiffs’ attempt to have the guaranties declared void and unenforceable and to recover damages, 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.” Characterizing a guaranty as “collateral and secondary to the underlying loan transaction,” the court observed that “[w]hile 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.”

Regulation B, which implements the ECOA, provides that the term “applicant” includes a guarantor. However, having found the ECOA’s text to be “unambiguous regarding whether a guarantor constitutes an applicant,” the Eighth Circuit ruled that the Regulation B definition was not entitled to deference under the framework established by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council. The Eighth Circuit also declined to follow the Sixth Circuit’s contrary decision last year in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp.

The ECOA’s marital and other discrimination prohibitions apply to both consumer and business purpose credit. Because the Consumer Financial Protection Bureau has authority to enforce the ECOA, lenders making business loans are subject to the CFPB’s ECOA jurisdiction.

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

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.


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