iOn March 22, 2016, the U.S. Supreme Court issued its first 4-4 decision following the death of Justice Antonin Scalia, thereby affirming the 8th Circuit in Hawkins v. Community Bank of Raymore. The Court's per curiam opinion was a simple sentence providing: "The judgment is affirmed by an equally divided Court." Unfortunately, the Supreme Court's decision fails to provide the clarity that creditors were seeking in defending against guarantor ECOA claims and affirmative defenses.
Through the decision, the Supreme Court upheld the 8th Circuit Court of Appeals ruling that guarantors are unambiguously excluded as "applicants" under the Equal Credit Opportunity Act (ECOA), and cannot claim a violation of ECOA as an affirmative defense to avoid liability on guaranties with lenders. In Hawkins the central issue was whether Respondent, the Bank of Raymore, improperly required Petitioners, Valerie Hawkins and Janice Patterson, to personally and unconditionally guarantee the repayment of certain loans it made to a company owned by Respondents' husbands, not by Hawkins or Patterson.
Petitioners alleged they were required to personally guarantee repayment of the loans solely because they were the spouses of the company’s owners. They contended this violated ECOA and Regulation B, a regulation enacted pursuant to ECOA, which many claim exceeds the purpose and scope of ECOA. In a unanimous decision, the 8th Circuit affirmed the Missouri Western District Court’s finding that guarantors are not “applicants” for credit under ECOA’s unambiguous definition of that term and are, therefore, not protected under ECOA through its marital discrimination prohibition.
What to Expect Moving Forward
The tie decision from the Supreme Court is significant because the decision has no binding precedent on other courts. Thus, the ruling does not resolve the split of authority among federal and state courts, including the 6th Circuit's contrary finding in RL BB Acquisitions, LLC v. Bridgemill Commons Dev. Group, where the court found that guarantors are "applicants" under ECOA. State courts, including the Missouri Supreme Court, have also found that guarantors are applicants under ECOA.
As it stands, the 8th Circuit’s ruling is binding among federal courts in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. The 6th Circuit’s ruling in RL BB Acquisitions remains the law for federal courts in Kentucky, Michigan, Ohio and Tennessee. Given the continued split of authority, we expect that courts from other circuits will continue to address this issue and provide their interpretation of ECOA.
In state and federal district court cases prior to Hawkins, lawyers have successfully argued on behalf of financial institutions that ECOA does not apply to spousal guarantors because they are not applicants for loans unless they actually apply for credit. ECOA is an invaluable piece of legislation that very correctly prohibits creditors from discriminating against loan applicants on the basis of race, sex, age, religion, national origin or marital status. (For instance, see Champion Bank v. Regional Development, et al., United States District Court, Eastern District of Missouri, Case No. 4:08CV1807 CDP).
With respect to marital status, ECOA serves the invaluable purpose of prohibi ting any archaic thinking that a female applicant for credit is somehow more creditworthy “if she has a husband standing beside her.” However, ECOA by its plain terms does not extend its protection to guarantors who do not apply for credit.
Regulation B was enacted by an unelected Board of Governors of the Federal Reserve System—and not by Congress. This board is responsible for promulgating rules to promote the enforcement of ECOA; it is not responsible or authorized to make new laws in addition to ECOA. As many financial institutions have argued, and as the 8th Circuit has agreed, the board reached beyond the language of ECOA in enacting Regulation B and in effectively converting non-applicant guarantors into “applicants.”
