August 6, 2014
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8th Circuit Rules ECOA Does Not Apply to Guarantors of Loans
After argument before the U.S. Court of Appeals for the 8th Circuit in Hawkins v. Community Bank of Raymore, Case No. 13-3065, Lathrop Gage attorneys Tom Stahl, Greer Lang and Justin Nichols obtained a ruling that the Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. §1691 et seq., does not apply to guarantors of loans. This holding, consistent with recent decisions of the federal district courts in the state of Missouri (but contrary to Regulation B (12 C.F.R §202.2) promulgated by the Federal Reserve some 30 years ago), invalidates those cases in the 8th Circuit holding that guarantors are protected under the ECOA and gives credence to arguments made in other circuits to that effect as well.
CBR argued that under the clear and unambiguous language of the ECOA, the anti-discrimination provisions of the statute were intended only to apply to those who are “applicants” for credit, and that guarantors are not applicants for credit. Instead, guarantors are simply in a position of providing collateral security to CBR on behalf of the actual “applicant” for credit, in this case, PHC. The district court agreed and granted summary judgment in favor of CBR, holding that the ECOA and Regulation B do not apply to guarantors of loans.
The 8th Circuit held that under Chevron, 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. 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.”
The 8th Circuit’s decision criticized a recent holding from the 6th Circuit to the contrary in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F. 3d 380. In that case, the Court was faced with much the same issue as in Hawkins, but held that by virtue of the regulatory interpretation of the statute, guarantors were covered by the ECOA. The 8th Circuit noted its limited agreement with the 6th Circuit that guarantors are simply third parties in the application process, and suggests that fact alone ends the inquiry as to whether guarantors are covered by the ECOA.
The 8th Circuit held that its decision comports with the purpose of the ECOA, which is to eliminate discrimination on the basis of, among other things, marital status. “By requesting the execution of a guaranty, a lender does not thereby exclude the guarantor from the lending process or deny the guarantors access to credit… Here, Hawkins and Patterson…complain that they were improperly included in that process by being required to execute guaranties.” The Court also noted, in a footnote, that because Missouri is a state with tenancies by the entirety, there likely was no violation of the ECOA even if it did apply to guarantors, because requiring the guaranties was a “sound commercial practice unrelated to any stereotypical view of a wife’s role.”
What It Means For Banks
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