The recent death of Justice Antonin Scalia has impacted a decision of great importance to lenders: Does the Equal Credit Opportunity Act ("ECOA") protect a borrower's spouse when the lender requires the spouse to guarantee a loan?
Congress enacted ECOA, in part, to eliminate discrimination by financial institutions such as the refusal to issue individual credit to married women. Prior to ECOA, lenders routinely required husbands to co-sign loans made to their wives. ECOA was intended to forbid a creditor from denying credit to a woman on the basis of the creditor's belief that she would not be a good credit risk.
Although ECOA may have been intended to combat a spouse's improper exclusion from the lending process based on marital status, over the years it has also been used as a weapon by spouses claiming improper inclusion in the lending process. When lenders seek to enforce the guaranty of a so-called "non-borrower spouse," the non-borrowing spouses have increasingly raised affirmative defenses or counterclaims alleging lender liability claims and violation of ECOA. When this occurs, 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 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.
On March 22, 2016, in Hawkins v. Community Bank of Raymore, the U.S. Supreme Court affirmed, by an equally divided vote (4-4), a ruling by the Eighth Circuit Court of Appeals that a guarantor spouse is not protected from marital-status discrimination under ECOA. In Hawkins, the borrowers' wives argued that the requirement that they be guarantors of loans for a business owned by their husbands discriminated against them on the basis of their marital status. As a result, they sought to have their guaranties declared void and unenforceable and to recover statutory and other damages for the alleged violation. The Eighth Circuit disagreed, and, in a nutshell, concluded that the ECOA only protected “applicants” from marital-status discrimination and that a guarantor is not an applicant (like a borrower) because he or she assumes a secondary, different liability than a borrower.
In Hawkins, the Supreme Court's decision consisted of nine words: “The judgment is affirmed by an equally divided Court.” Although the decision sounds like good news for lenders, there are two catches for lenders in North Carolina. First, while a tie vote affirms the prior decision from the lower court, it is not a precedent applicable nationwide or even for the Supreme Court when and if the issue is presented to it in the future. It was widely anticipated that Justice Scalia would vote to affirm the Eighth Circuit's ruling, in which case the vote in the Supreme Court would have been 5-4, and Hawkins would have become precedent and the "law of the land" throughout the United States. His death prevented that from happening.
The second catch is that the Eighth Circuit is comprised of Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Missouri, and Arkansas. North Carolina is in the Fourth Circuit and the Fourth Circuit Court of Appeals has not yet considered the issue—and is not bound to follow the conclusions of the Eighth (or any other) Circuit or the Supreme Court's tie vote in Hawkins. Consequently, we cannot expect a uniform resolution of ECOA spousal guaranty issue until a replacement is appointed for Justice Scalia and the Supreme Court takes up the matter again.
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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.