Back in April of this year, I posted about the United States Supreme Court taking up review of a banking law case involving the Equal Credit Opportunity Act. At the time, we knew that the USSC would likely hear oral arguments on the case sometime during its October 2015 term. This week the USSC released its Oral Argument calendar for the Session beginning October 5, 2015 and guess what? The hot topic banking law case is set for oral argument on Monday, October 5! I’ll be watching closely to see when the Court issues its decision. For those that need a refresher on the issue that the Court is deciding, I am re-posting below my summary from April.
The United States Supreme Court recently accepted Certiorari review of a case from the 8th Circuit Court of Appeals involving whether a bank’s requirement that spouses execute commercial guaranties violates the protections of the Equal Credit Opportunity Act (ECOA). It’s not every day that the USSC takes up an issue on banking regulations, so this is one to watch.
For lenders and banking compliance folks, the facts of the case are pretty standard. A corporate borrower took out a loan with the bank. The husbands had an ownership interest in the corporate borrower, but the wives did not. The bank required the wives to sign guaranties of the debt. At some point the loan went into default and the wives sued the bank to have their guaranties declared invalid because, they argued, requiring their guaranties violated ECOA.
For those compliance folks reading this blog, you are probably predicting that the Judge ruled in favor of the wives and invalidated the guaranties. But if that were the case, I wouldn’t writing about it here, right?
The trial court judge ruled in the bank’s favor and said there was no violation of ECOA because the wives were not “applicants” within the meaning of ECOA. The 8th Circuit Court of Appeals agreed. The reasoning was as follows: The ECOA definition of “applicant” is “[A]ny person who applies to a creditor directly for an extension, renewal, or continuation of credit….” The Court explained:
[I]t does not follow from the execution of a guaranty that a guarantor has requested credit or otherwise been involved in applying for credit. Thus, a guarantor does not request credit and therefore cannot qualify as an applicant under the unambiguous text of the ECOA.
Now, for those of you familiar with this area of the law, you are probably wondering where the Regulation B definition fits into this analysis. Reg B is the implementing regulation of the ECOA statute. Reg B explicitly states that guarantors are applicants within the meaning of ECOA. The Reg B definition of applicant is:
[A]ny person who requests or who has received an extension of credit from a creditor…. [T]he term includes guarantors….
The Appellate Court in this case did not apply Reg B because it applied a long-standing rule of statutory interpretation, which is that if a statute (here, ECOA) is clear on its face as to the intent of Congress, the court will not look to an agency interpretation/regulation (here, Reg B) for any further guidance. A court will only look to the agency regulation if statute is silent or ambiguous as to a specific issue. The Appellate Court here said ECOA was unambiguous with respect to the meaning of applicant not including guarantors so it would not consider the Reg B definition. Implicit in this ruling is a suggestion that the agencies did not have authority to include guarantors in the definition of applicants when they enacted Reg B.
The decision of the 8th Circuit Court of Appeals not only conflicts with how many professionals have been applying ECOA in their institutions, but also with how other courts have applied ECOA in other lawsuits. Because of this conflict among the courts, the USSC has accepted review of these issues. The questions that the USSC says it will decide are:
- Are “primarily and unconditionally liable” spousal guarantors unambiguously excluded from being ECOA “applicants” because they are not integrally part of “any aspect of a credit transaction”?
- Did the Federal Reserve Board have authority under ECOA to include by regulation spousal guarantors as “applicants” to further the purposes of eliminating discrimination against married women?
It is anticipated that the USSC will rule on these questions sometime later this year, a ruling that will be of interest to many in the banking and compliance industry for sure!