Contact: John Walsh; Spencer Fane Britt & Browne LLP (Missouri, USA)
Under the Equal Credit Opportunity Act (15 U.S.C. §1691 et seq. (ECOA)), a creditor may not discriminate against a credit applicant “with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” 15 U.S.C. §1691(a)(1). Regulation B under the ECOA prohibits a creditor
from requiring the signature of a credit applicant’s spouse or another person “if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested.” 12 C.F.R. §202.7(d)(2). In no event may a creditor require that an applicant’s spouse be the person to be added to the creditor’s creditworthiness test analysis. The spouse must voluntarily offer to do so. 12 C.F.R. §202.7(d)(5).
In Frontenac Bank v. T. R. Hughes, Inc., Case No. ED97499, issued September 25, 2012, the Missouri Court of Appeals, Eastern District, affirmed a trial court holding that a bank’s violation of ECOA and Regulation B released the spouse of the owner of two borrowers from her guaranty obligations.
The Court of Appeals deferred to the trial court’s findings of fact, including:
- The owner/guarantor had submitted joint financial statements with his spouse. Although the bank deemed such submission to be the spouse’s offer to provide her guaranty, Regulation B expressly provides that “[a] creditor shall not deem the submission of a joint financial statement . . . as an application for joint credit.” 12 C.F.R. §202.7(d)(1).
- The spouse did not intend to apply for credit from the bank and did not offer to execute the guaranties, even though her guaranty contained the preprinted acknowledgment that it “is executed at borrower’s request and not at the request of the lender.” The spouse responded that she only signed (apparently without reading) what her husband asked her to sign. The bank’s form of personal financial statements included a box for the spouse to check that she was voluntarily offering her guaranty, but that box was not checked.
- The bank’s records reflected that each borrower (the husband’s two businesses) met the only discernible standards in the bank’s loan policy (three loan-to-value ratios) and therefore the trial court found as fact that each borrower was independently creditworthy.
- The bank failed to conduct any analysis of the borrowers’ creditworthiness regarding the proposed loan prior to requiring the spouse’s guaranties and demanded her guaranties solely on the basis that she was the spouse of the owner of the borrowers.
The bank’s position was weakened by the testimony of the bank’s former (and therefore without allegiance to the bank) banking center president that the bank routinely required guaranties from wives on all similar loans “because people ‘ought to be willing to support it with everything [they] had.’” A past bank president and senior vice president also testified that the bank routinely required spousal guaranties “because the bank would otherwise question why they were not willing to ‘step up’ if they wanted the money lent.”
The Court of Appeals deferred to the trial court’s findings of fact as being supported by substantial evidence and held that the trial court properly declared and applied the ECOA and Regulation B and that, as a result, the spouse’s guaranties were null and void.
This case should be a chilling refresher course for commercial lenders on the topic of spousal guaranties and compliance with Regulation B, including the following:
- Do not consider the submission of joint financial statements to be an application for joint credit. Regulation B expressly states that it is not. 12 C.F.R. §202.7(d)(2).
- Review loan policies for determining a potential borrower’s creditworthiness and consider including non-quantitative as well as quantitative criteria that would arguably allow a determination of non-creditworthiness even though a borrower meets the policy’s quantitative criteria.
- Document that the lender actually analyzed the credit by applying the lender’s loan policies.
- Educate loan officers about Regulation B, especially the prohibition of requesting a borrower or guarantor to have his/her spouse guarantee the loan. If the credit applicant is not creditworthy, the loan officer may only ask the applicant for additional financial strength and may take a spouse’s guaranty only if offered by the spouse. Lenders should consider whether communications regarding that matter should be held in the presence of a second lender representative for evidentiary purposes and should be confirmed in writing (at least by e-mail).
- If the credit needs to have jointly owned property pledged to secure the loan in order to meet the lender’s creditworthiness policies, Regulation B allows a creditor to require the signature of a spouse if necessary to make jointly owned property available as collateral, such as being required to sign a deed of trust or mortgage on property owned jointly without signing a guaranty. A spouse may also validly be required to sign a waiver of marital rights in property owned by, or owned jointly with, the credit applicant. 12 C.F.R. §202.7(d)(4).
