The U.S. Supreme Court heard oral arguments on Monday in the case of Hawkins v. Community Bank of Raymore, the result of which will determine whether a spousal guarantor is an “applicant” under the Equal Credit Opportunity Act (ECOA). As discussed in our previous legal alert, the Court is expected to resolve a circuit split created by the Eighth Circuit’s decision in Hawkins, which conflicted with the ruling by the Sixth Circuit in RL BB Acquisition LLC v. Bridgemill Commons Development Group LLC.

At its core, Hawkins is a case about statutory interpretation, the key issue being whether a spouse-guarantor is an “applicant” under the ECOA.

The petitioners argued that Community Bank of Raymore engaged in marital status discrimination in violation of the ECOA when the bank required them to serve as loan guarantors on business loans made to their respective husbands to fund a failed real estate venture in Missouri. When the husbands’ company failed to make payments, Community declared the loans to be in default and demanded payment from both the company and from the petitioners as guarantors. In response, the petitioners brought a marital status discrimination claim under ECOA, seeking damages and an order declaring their personal guarantees void and unenforceable.

The Eighth Circuit had concluded that ECOA did not provide a cause of action to the petitioners, declining to grant deference to an interpretation of “applicant” that would include a spouse-guarantor. The ECOA defines an “applicant” as one 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.” However, Regulation B, which implements the ECOA, expands on this definition, interpreting ECOA’s definition of “applicant” as including a spouse-guarantor. The Federal Reserve Board added this interpretation to Regulation B in 1985; prior to that addition, the Regulation had specifically excluded guarantors.

At oral argument on October 5, 2015, the justices were not hesitant to ask questions of both sides, and the questions appeared to reflect differing positions by the justices on the Court. Attention centered around the meaning of the word “applicant,” and whether this term should be understood as including a person who is not directly applying for a loan.

Attempting to predict the outcome of such a case based on the questions and remarks of the justices at oral argument is generally a fool’s errand. That said, Chief Justice Roberts, along with Justices Alito and Justice Scalia, appeared skeptical of the argument advanced by the petitioners, focusing on the plain meaning of the term “applicant.” Justice Scalia offered the analogy of writing a letter of recommendation on behalf of a student applying to law school, asking whether he would be a law school “applicant” under petitioners’ argument. Justice Breyer, on the other hand, gave the counterexample of a parent applying for private school admission on behalf of his or her child, suggesting that the meaning of “applicant” depends on context.

Justice Kennedy voiced concern as to whether treating guarantors as applicants could have the effect of allowing guarantors to have a loan declared unenforceable, and Justice Kagan similarly asked about whether petitioners’ proposed reading of the ECOA could “create liability on a scale that Congress wouldn't have expected.”

Justices Sotomayor and Ginsburg, occasionally joined by Justices Breyer and Kagan, directed a number of questions at counsel for the respondents. Justice Sotomayor in particular appeared open to accepting the understanding of “applicant” set forth in Regulation B. Additionally, Justice Ginsburg mentioned multiple times the fact that the Federal Reserve Board had previously excluded guarantors from the definition of “applicant,” implying she did not think that a “plain language” reading of the term “applicant” should be controlling.

Notably, the United States filed a brief in the case as amicus curiae, asserting that Regulation B “permissibly interprets ECOA to protect guarantors from discrimination” and is entitled to deference. The CFPB—the agency now charged with overseeing the ECOA and promulgating implementing regulations—joined in the brief.  Additionally, Assistant to the Solicitor General Brian Fletcher argued on behalf of the United States in support of the petitioners.

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 Consumer Financial Services Group Practice Leader Alan S. Kaplinsky, John L. Culhane, Jr., Jeremy C. Sairsingh, or the member of the group with whom you regularly work.


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