MARRIAGE MIGHT GET MORE EXPENSIVE: CAN BANKS REQUIRE SPOUSES TO GUARANTEE LOANS?

By: Alec Mitchell, Volume 104 Staff Member

I.  INTRODUCTION

The basic concept of a loan is simple: an individual walks into a bank and the bank gives them money on their promise to pay it back, with interest. But what if the bank is worried that the individual might not pay the money back? Banks frequently require borrowers to receive the backing of a third party, commonly known as a “guarantor,” who will pay the borrower’s debt if they default.[1] Young people without a credit history or those with poor credit histories are most commonly asked to find a guarantor.[2] In other instances, banks might ask that a borrower’s spouse sign as a guarantor, creating what courts have termed “spouse-guarantors.”[3]

But when the bank requires a spouse to guarantee the loan, they risk violating a federal law meant to prohibit discrimination in lending.[4] A number of circuit courts, including a divided Supreme Court, have failed to answer a seemingly simple question: can spouse-guarantors seek protection under the federal law?[5] The answer carries important weight. If spouse-guarantors are not protected, they cannot defend themselves against lawsuits by lenders looking to collect on their forced guarantee.[6]

II.  BACKGROUND

The controversy over spouse-guarantors starts with a federal law, the Equal Credit and Opportunity Act (“ECOA”),[7] and a federal regulation defining the application of that law, colloquially known as “Regulation B.”[8]

The ECOA, enacted in 1974, aims to prevent creditors from discriminating against borrowers.[9] The law specifically prohibits discrimination of any “applicant . . . on the basis of . . . sex or marital status . . . .”[10] The word “applicant” is defined as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit . . . .”[11] The law currently gives the Consumer Finance Protection Bureau (CFPB) the authority to prescribe rules to “carry out” the ECOA.[12]

Regulation B defines an “applicant” as “any person who requests or who has received an extension of credit from a creditor . . . [T]he term includes guarantors.”[13] Regulation B has included guarantors as applicants since 1986, when it was amended to do so.[14]

The spouse-guarantor debate revolves around whether courts should use the ECOA or Regulation B definition of “applicant.” In other words, does “applicant” include guarantors? Because the definitions of applicant in the ECOA and Regulation B differ, courts typically apply the test from Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. to determine which definition controls.[15] Courts first look to whether Congress has “delegated authority to the agency generally to make rules.”[16] If so, courts then go through a two-step test. First, a court determines whether Congress has addressed the issue at hand, and if so, whether the statute is ambiguous.[17] If the statute is clear, courts stick with the statute. If it is ambiguous, courts then ask “whether the agency’s answer is based on a permissible construction of the statute.”[18] If the agency passes this second step, a court will defer to the agency’s interpretation.

III.  CIRCUITS SPLIT ON THE ISSUE

In Moran Foods, the Seventh Circuit became the first circuit to directly question Regulation B’s definition of “applicant” in the context of marital discrimination.[19] In that case, a grocery store owner’s wife signed as a required guarantor to a loan; but when the grocery store failed and the lender sued the wife as a guarantor, she claimed the lender violated the ECOA because her signature was required solely due to her status as the owner’s spouse.[20] The Court ruled against the wife on other grounds,[21] but one paragraph of dicta was devoted to rejecting Regulation B’s definition of “applicant.”[22] Without applying Chevron, the Court laid out public policy arguments to claim that, “we doubt [the definition of applicant] can be stretched far enough to allow [Regulation B’s] interpretation.”[23]

The issue remained dormant in the circuits until 2014, when two courts split on the issue. The Eighth Circuit, in Hawkins v. Community Bank of Raymore, agreed with the Seventh Circuit and held that the agency was not entitled to Chevron deference because the definition of “applicant” under the ECOA was not ambiguous.[24] The Sixth Circuit disagreed. It found that the terms “applies” and “credit” in the ECOA were sufficiently broad as to create uncertainty whether the ECOA meant to include guarantors as applicants.[25] The Court performed the analysis from Chevron, finding that Congress had authorized the CFPB to interpret the ECOA and that the agency’s interpretation under Regulation B was a permissible construction of the statute.[26] The Supreme Court granted certiorari on Hawkins, but was unable to resolve the split because Justice Scalia’s death left the court equally divided on the issue. [27]

Recently, the Eleventh Circuit joined the logic of the Seventh and Eighth Circuits, holding that the definition of “applicant” was not ambiguous and, therefore, the agency was not entitled to Chevron deference. [28]

IV.  RESOLVING THE CIRCUIT SPLIT

The recent Eleventh Circuit decision[29] provides the Supreme Court another opportunity to address the circuit split, this time with a full Court. I argue that they should use the Sixth Circuit’s approach and defer to Regulation B’s definition of “applicant.” Deference to the agency’s interpretation is appropriate considering the ambiguity of the statutory definition, Regulation B’s longstanding practice of considering guarantors as applicants, and the broad goals of the ECOA.

Circuits excluding spouse-guarantors from the protections of the ECOA have relied on narrow definitions of the term “apply” to support their reasoning.[30] The Eleventh Circuit repeatedly argued that an applicant is limited to the borrower because all dictionary definitions of “apply” are based on a request.[31] But, as the concurrence pointed out, this does nothing to diminish the fact that guarantors can also “request” credit for another person.[32] The majority also relied on circular logic, reasoning that the use of definite articles,[33] referring to “the applicant,” limits the ECOA to borrowers only.[34] But this assertion was only supported because the majority had already limited the scope of “applicant” to primary borrowers.

Indeed, the term “applicant” does not have a consistent definition across statutes. In one statute, applicants are narrowly defined as those that submit a specifically designed application.[35] In contrast, another federal statute broadly defines an applicant as any entity that is eligible for a program.[36] ECOA’s definition appears to fall somewhere in the middle of these two schemes: it does not explicitly limit applicants to a primary party who submits a specific application, but it does at least require some sort of application to be made.

The move by some courts to label “applicant” as unambiguous is even more confusing when one considers the history of the ECOA. The Act’s regulations have prohibited spouse-guarantors since 1975,[37] and have explicitly included guarantors under the definition of “applicant” since 1986.[38] Congress has long had the opportunity to change the ECOA. They have done so at least eight times, including a major revision in 2010.[39] Not once have they touched the definition of “applicant,” even in the face of the well-publicized Regulation B.[40] And until the Seventh Circuit’s contrary dicta, many lower court decisions were in agreement that the ECOA’s provisions included spouse-guarantors.[41]

In light of this history, it seems difficult to argue that spouse-guarantors cannot assert protections under the ECOA. It is even more difficult to understand how courts can suddenly interpret a single word, “applicant,” as unambiguously excluding guarantors when the exact opposite interpretation had been accepted and used for decades.

But courts are not limited to defining a word in a dictionary vacuum. The Supreme Court has noted that, “[i]n determining the meaning of the statute, we look not only to the particular statutory language, but to the design of the statute as a whole and to its object and policy.”[42]

The ECOA was passed with the broad goal of reducing discrimination against borrowers.[43] One purpose of the Act was to require banks to “make that credit equally available to all creditworthy customers without regard to sex or marital status.”[44] The ECOA similarly prohibits such discrimination with respect to “any aspect of a credit transaction,” not just the initial application.[45] Committee reports show that the final conference committee purposefully chose to broaden the language, providing for “flexibility of the regulatory authority.”[46]

All of these broad provisions lead to a fundamental question: why would Congress pass legislation prohibiting discrimination against two distinct individuals, but give only one the ability to pursue remedies? It would seem to upend Congress’s intention by providing a major loophole through which banks could discriminate against one spouse and go unchallenged. The more likely answer is that Congress did intend to cover such situations, or at the very least, intended for agencies to fill in the details of the broad mandate.

With all evidence pointing towards a broad remedial statute, the Supreme Court can look to its own precedent for answers. The ECOA is also similar to a related federal law, the Truth in Lending Act. That Act, like ECOA,[47] was passed after years of study.[48] The Act also involved a complex problem that required broad remedial solutions by Congress.[49] And both Acts use almost identical language in delegating authority to promulgate rules.[50] The Supreme Court, responding to a challenge against the Federal Reserve’s rules under the Truth in Lending Act, pointed to the broad remedial nature of the legislation and deferred to the agency’s interpretation.[51] The Court should take the same approach when it comes to the spouse-guarantor debate under the ECOA.

V.  CONCLUSION

The Supreme Court has the opportunity to clarify a landmark lending discrimination law that has confused circuit courts. Banks have skirted the law by requiring spouses to guarantee loans, despite clear Congressional intent to ban discrimination based on marital status. The Court can abide by the letter and spirit of the Equal Credit and Opportunity Act by deferring to Regulation B’s definition of “applicant” and giving spouse-guarantors the right to protect themselves from discrimination.

[1] Guarantor, Black’s Law Dictionary (11th ed. 2019).

[2] Joseph F. Cudia, Personal Guarantees: Recent Cases Setting Dangerous Precedent, 10 Ohio St. Bus. L.J. 1, 3–4 (2015).

[3] RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380, 383 (6th Cir. 2014).

[4] See Equal Credit Opportunity Act, Pub. L. No. 93-495, § 502, 88 Stat. 1521 (1974) (prohibiting discrimination by lenders on the basis of “marital status”).

[5] Compare Hawkins v. Cmty. Bank of Raymore, 136 S. Ct. 1072 (2016) (per curiam), and Moran Foods, Inc. v. Mid-Atl. Mkt. Dev. Co., 476 F.3d 436 (7th Cir. 2007), with RL BB Acquisition, 754 F.3d 380 (6th Cir. 2014).

[6] See Moran Foods, 476 F.3d at 442 (prohibiting spouse-guarantor from counterclaiming based on a violation of the ECOA).

[7] Equal Credit Opportunity Act, 15 U.S.C. § 1691 (2018).

[8] See Equal Credit Opportunity Act (Regulation B), 12 C.F.R. § 1002 (2018).

[9] See § 502, 88 Stat. at 1521.

[10] 15 U.S.C. § 1691(a).

[11] 15 U.S.C. § 1691a(b).

[12] 15 U.S.C. § 1691b.

[13] 12 C.F.R. § 1002.2(e).

[14] 12 C.F.R. § 202.2(e) (1986).

[15] Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).

[16] United States v. Mead Corp., 533 U.S. 218, 226–27 (2001).

[17] Chevron, 467 U.S. at 842–43 (“First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter.”).

[18] Id. at 843.

[19] See Moran Foods, Inc. v. Mid-Atl. Mkt. Dev. Co., 476 F.3d 436 (7th Cir. 2007).

[20] See Appellees’ Brief and Cross-Appeal at 23, Moran Foods, 476 F.3d 436 (Nos. 05-3656 & 05-3735).

[21] Moran Foods, 476 F.3d at 441.

[22] See id.

[23] See id.

[24] Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937, 940–42 (8th Cir. 2014).

[25] RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380, 384–85 (6th Cir. 2014).

[26] Id. at 385–86, 389.

[27] Hawkins v. Cmty. Bank of Raymore, 136 S. Ct. 1072 (2016) (per curiam), rehearing denied 136 S. Ct. 2534.

[28] Regions Bank v. Legal Outsource PA, 936 F.3d 1184, 1190–93 (11th Cir. 2019). The concurring judge disagreed with the majority’s reasoning on spouse-guarantors under the ECOA, but agreed with the district court’s summary judgment on other grounds. Id. at 1200–22 (Rosenbaum, J., concurring in part).

[29] See Regions Bank, 936 F.3d 1184.

[30] See id.; Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937 (8th Cir. 2014).

[31] See Regions Bank, 936 F.3d at 1190–91.

[32] See id. at 1212–13 (Rosenbaum, J., concurring in part).

[33] See, e.g., Grammar Canon, Black’s Law Dictionary (11th ed. 2019).

[34] Regions Bank, 936 F.3d at 1192.

[35] See 29 U.S.C. § 3226(b)(2) (2015).

[36] See 42 U.S.C. § 12902(2) (2016).

[37] Final Rulemaking, 40 Fed. Reg. 49,298 (Oct. 22, 1975) (to be codified at 12 C.F.R. pt. 202).

[38] 12 C.F.R. § 202.2(e) (1986).

[39] See, e.g., Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub L. No. 111-203, 124 Stat. 1376 (2010).

[40] See generally Equal Credit Opportunity; Revision of Regulation B; Official Staff Commentary, 50 Fed. Reg. 48,018 (Nov. 20, 1985) (to be codified at 12 C.F.R. pts. 202 & 202(a)) (finalizing rule changes after a lengthy review).

[41] See generally Empire Bank v. Dumond, No. 13–CV–388, 2013 WL 6238605, at *6 (N.D.Okla. Dec. 3, 2013) (collecting cases).

[42] Crandon v. U.S., 494 U.S. 152, 158 (1990).

[43] Equal Credit Opportunity Act, Pub. L. No. 93-495, § 502, 88 Stat. 1521 (1974).

[44] Id.

[45] § 701 (emphasis added).

[46] H.R. Rep. No. 93-1429 (1974) (Conf. Rep.).

[47] See, e.g., Fair Credit Billing: Hearing on S. 652 Before the Subcomm. on Fin. Insts. of the Comm. On Banking, Housing and Urban Affairs, 92nd Cong. (1971).

[48] See Mourning v. Family Publ’ns Service, Inc., 411 U.S. 356, 363 (1973).

[49] See id. at 365.

[50] Compare Pub. L. No. 90-321, § 105, 82 Stat. 146 (1968), with Pub L. No. 93-495, § 703, 88 Stat. 1521 (1974).

[51] See Mourning, 411 U.S. at 371.