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North Carolina Supreme Court Rules that ECOA Defenses May Be Waived by Obligors

| Lance P. Martin Lance P. Martin

On August 20, 2014, the North Carolina Supreme Court issued an opinion that provides a powerful tool for lenders with spousal guaranty agreements in their portfolios.  The unanimous opinion held that a blanket waiver of defenses contained in a forbearance agreement executed by the borrowers and guarantors was sufficient to defeat Equal Credit Opportunity Act ("ECOA") defenses based on spousal guaranties.  This decision is a vaccine for lenders seeking to inoculate themselves from future fights with borrowers and guarantors, and is welcome news for any lender who may have had to litigate the enforceability of a spousal guaranty or other ECOA issues.

Congress enacted the ECOA, in part, to eliminate discrimination by financial institutions that had long refused to consider married women for individual credit.  Historically, industry practice required husbands to co-sign loans to their wives.  Although there is a split of authority in the federal courts of appeal as to whether spousal guaranties are valid, the rules and regulations implementing the ECOA governs when a lender may or may not procure a spousal guaranty.  Broadly speaking, a lender may not require an applicant's spouse to execute a guaranty if the applicant, considered alone, qualifies for the loan under the lender's underwriting standards.  The ECOA differentiates between secured credit and unsecured credit.  In situations where jointly-held collateral is necessary to support the lender's creditworthiness standards, the ECOA does allow a lender to require a spouse to execute a deed of trust encumbering property—but not a guaranty.  The execution of the deed of trust by the spouse in states with laws similar to North Carolina is necessary to make it enforceable against jointly-titled property.

In practice, when lenders seek to enforce the guaranty of the so-called non-borrower spouse, they are often met with affirmative defenses or counterclaims alleging lender liability claims and a violation of the ECOA.  Rather than having a claim that should be resolved by a motion in the lender's favor, the lender is forced to prove that its underwriting process complied with the ECOA.  This can be time-consuming and expensive in litigation.  And in cases where the underwriting file is incomplete or not well documented, the lender may not be able to enforce the guaranty at all—at least not without having the issue decided by a jury.

The recent Supreme Court decision reversed a 2013 decision by the North Carolina Court of Appeals that was troubling for lenders.  The Court of Appeals held that a guarantor-spouse could assert a violation of the ECOA as an affirmative defense in an action brought by a lender to recover under a guaranty agreement.  The Court differentiated between a creditor requesting a guaranty from a non-borrower spouse, which is allowed, and a creditor requiring it, which is generally prohibited. 

The Court of Appeals also held that claims under the ECOA could not be waived by the guarantors through a release in a forbearance agreement and that, since the guaranty was void due to the ECOA violation, the waiver in the forbearance agreement was void as well.

The North Carolina Supreme Court's decision held that the execution of an agreement containing provisions acknowledging the validity of the debt and waiving any and all claims against the lender is sufficient to defeat claims that the guaranty of a non-borrower spouse is unenforceable because it violates the ECOA.  The upshot for lenders is that it is now established under North Carolina law that a guarantor may waive his or her ECOA defenses. 

Ward and Smith, P.A. represented the North Carolina Bankers Association as amicus counsel in the case.  We can assist lenders in drafting renewal, modification, and forbearance agreements that contain express provisions waiving defenses under the ECOA.  We can also assist lenders in crafting loan documents and implementing underwriting and loan origination protocols to reduce the risk of ECOA claims from the inception of the borrower-lender relationship.

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© 2016 Ward and Smith, P.A. For further information regarding the issues described above, please contact Lance P. Martin.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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