The Supreme Court to Consider Whether Spousal Loan Guarantors Are “Applicants” for Credit under ECOA

By: Andrew C. Glass, Olivia Kelman

The United States Supreme Court has granted certiorari to decide whether the Equal Credit Opportunity Act (“ECOA”) excludes loan guarantors from the definition of “applicants” entitled to bring suit under the Act. See Hawkins v. Community Bank of Raymore, No. 14-520 (U.S. Mar. 2, 2015). Specifically, the Court will decide whether the Federal Reserve Board exceeded its authority in its 2003 amendment to Regulation B, the regulation implementing ECOA, to purportedly bring guarantors within the ambit of ECOA’s protection. The Court’s decision may have far-reaching implications for lenders extending credit guaranteed by a non-borrower.

Between 2005 and 2008, the defendant Community Bank of Raymore (“Community”) made loans to a limited liability company (the “LLC”) to fund the development of a residential subdivision. The loans were guaranteed by the LLC’s members and by their spouses. When the LLC defaulted on the loans, Community accelerated the debt and demanded payment from the spousal guarantors. The guarantors brought suit alleging that the guaranties were “void and unenforceable” because Community required them to execute the guaranties “solely” because they were married to the LLC’s members. The spousal guarantors argued that this requirement violated ECOA’s nondiscrimination provisions which protected them as “applicants” for credit. The district court granted Community’s motion for summary judgment and found that (a) the guarantors were not entitled to protection under ECOA, and (b) the guaranties were enforceable.

ECOA protects “any applicant” for credit from discrimination on various bases in connection with “any aspect” of a credit transaction. The Act defines “applicant” as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” In its 2003 rulemaking amendment to Regulation B, the Federal Reserve Board interpreted the term “applicant” as including guarantors, thus purporting to extend ECOA nondiscrimination protection to guarantors.

Applying the Chevron framework, however, the Eighth Circuit found that “the text of the ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another.” Finding the statutory text to be unambiguous, the Eighth Circuit concluded that “we will not defer to the Federal Reserve’s interpretation of applicant, and we conclude that a guarantor is not protected from marital-status discrimination by ECOA.”

The Supreme Court’s resolution of the case will be of significant interest to all lenders subject to ECOA and Regulation B. The parties are likely to complete briefing by late summer or fall 2015, with oral argument likely to occur in the fall 2015. K&L Gates LLP will continue to post developments as they occur.