Loan Guarantors Are Not ''Applicants'' under ECOA, Equally Divided U.S. Supreme Court Affirms

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.''

- Alan S. Kaplinsky, John L. Culhane, Jr., and Christopher J. Willis

CFPB Staff Will Present TRID Rule Webinar

The CFPB staff will present an informational webinar on Tuesday, April 12, 2016, to address issues with the TILA/RESPA Integrated Disclosure (TRID) rule in connection with questions that have been raised since the rule took effect on October 3, 2015. No further information has been provided with regard to the content of the webinar, Know Before You Owe Mortgage Disclosure Rule – Post-Effective Date Questions and Guidance.

Because few details have been released in connection with the presentation, topics could vary from general guidance to specific guidance on fact specific situations. The most recent informational webinar, held on March 1, 2016, and the first since the rule took effect, focused on construction to permanent loans. Bureau staff did note at the end of the last presentation that they have received many questions that were not addressed during the webinar, and those questions would impact future presentations. We previously discussed the March 1, 2016, CFPB webinar here.

- Matthew Smith

CFPB Posts Latest TRID Webinar

The CFPB updated its regulatory implementation materials to incorporate the recording of its March 1, 2016 presentation Know Before You Owe Mortgage Disclosure Rule – Construction Lending. The presentation focused on complying with the TILA/RESPA Integrated Disclosure (TRID) rule in connection with construction-to-permanent loans. The presentation, about which we had previously written, covered loans that have single closings and include a construction phase and a permanent phase. The publication of the presentation comes more than three weeks after it took place and follows the announcement that an April presentation is planned. The full presentation can be found here.

- Matthew Smith

Court Cannot Enter Default Against Trustee that Submits Unopposed Declaration of Non-Monetary Status

The California Court of Appeal recently held that a plaintiff cannot seek entry of default against a trustee that files a declaration of nonmonetary status pursuant to California Civil Code Section 2924l

Section 2924l provides that a trustee can avoid liability for monetary awards related to nonjudicial foreclosure if it files a “declaration of nonmonetary status.” To be afforded the statute's protection, the declaration must state that the trustee ''reasonably believes it was named as a defendant solely in its capacity as trustee, and not for misconduct in its duties.'' If no party objects to this declaration in a timely manner, the trustee need not participate in the action and cannot be subject to monetary damages or attorneys' fees.

In Bae v. T.D. Service Co. of Arizona, the plaintiff sued the trustee, along with the mortgagor bank, for issuing a notice of foreclosure and ultimately foreclosing on his property without seeking relief from a bankruptcy stay. Early in the proceedings, the trustee filed an unopposed declaration pursuant to Section 2924l. More than 18 months after the action began, the lower court entered a default judgment against the trustee for $3 million when it failed to respond to an amended complaint.

The trustee moved to set aside the default judgment because, among other reasons, it was shielded from liability due to its nonmonetary status. The trial court agreed and set aside the default.

The California Court of Appeal affirmed, holding that the trustee's assertion of nonmonetary status was a complete defense to the underlying foreclosure action. In addition, the Court held that a nonmonetary trustee ''cannot be required to file an answer or other responsive pleading to the complaint in order to avoid a default and a default judgment awarding monetary damages.''

The case is good news for trustees who are often named in California foreclosure actions simply because they appear in the chain of title. Trustees can rest easy with the knowledge that an assertion of nonmonetary status early in a case may protect them against entry of default after they discontinue participation.

- Taylor Steinbacher and John D. Sadler

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