ECOA Application to Spousal Guarantees

The Equal Credit Opportunity Act ("ECOA") was adopted in 1973 to eliminate discrimination against women and minorities. The ECOA is fleshed out by Regulation B as promulgated by the Federal Reserve Board. Spouses of applicants are given special protection under Regulation B and are themselves defined as fallng within the definition of applicant for purposes of having standing to bring actions for violation of the ECOA. Regulation B specifically provides that a creditor may not require the spouse of an applicant for credit to join in on any credit documents unless the parties are applying for joint credit. The Regulation provides that if an individual applicant does not have sufficient strength to support the credit request, the lender may ask that the applicant obtain additional financial strength through guarantors or co-signers. The lender may not, however, require that the applicant's spouse be the person who guarantees or co-signs on the loan.

Guarantor Remedies

Over the years courts have evolved in their treatment of an aggrieved party. The ECOA provides for actual damages, equitable relief (as the court deems necessary) and attorneys fees for a successful plaintiff. Traditionally, courts have found that the appropriate relief is to permit the spousal guarantor to seek damages under the ECOA as a way of setting off some or all of the lender's claim but not to invalidate the guarantee itself or the underlying obligation.

Eure v. Jefferson National Bank

A significant expansion of the guarantor's rights was established by the Supreme Court of Virginia in the case of Eure v. Jefferson National Bank, 448 SE2d 417 (Va 1994). The case involved a $100,000 loan originally obtained by Chesapeake Bay Builders, Inc. and guaranteed by Charles H. Eure, a principal in the company, and his wife Louise R. Eure. The company defaulted under the loan and the bank sued the guarantors. Louise R. Eure defended on the basis of a violation of the ECOA. The trial court dismissed her defense and entered judgment against her. The Virginia Supreme court granted her appeal for the limited purpose of determining whether a violation of the ECOA provides a defense to the enforcement of the guaranty. The court began its analysis by noting that there was no question that Mrs. Eure had no interest in the company and that the bank had done no investigation of her credit standing. Furthermore, there was no question that the bank had required her to sign the guaranty. A loan officer for the bank testified that it was "fairly common practice" to require the wife of a major stockholder to sign a guaranty and in fact the commitment letter required her signature.

Equitable Relief Justified

The court distinguished between Mrs. Eure's claim and those of previous cases dealing with ECOA as a defense by noting that Mrs. Eure was seeking to defend against enforcement of the guaranty and that she was not attempting to avoid the underlying obligation. The court then noted that the ECOA provided for the authority to grant equitable relief and that there was abundant federal and state law to support the proposition that a contract obtained in violation of the law should not be enforced. In the court's view, fashioning such a remedy was not violative of Congressional intent and was not the equivalent to fashioning a brand new remedy. "To deny Mrs. Eure the right to use the ECOA violation defensively would be to enforce conduct that this forbidden by the Act. Such use, therefore, would not be contrary to the will of congress or in any manner inconsistent with or derogatory of the remedies specifically provided in the Act."

Statute of Limitations

A further issue in the case was the fact that Mrs. Eure was attempting to assert the ECOA violation four years after the violation occurred. The ECOA contains a two year statute of limitations. The court held that while the statute of limitations would prevent an aggrieved party from seeking damages it did not bar its use as a defensive tool.

Federal Caselaw Granting Equitable Relief

Federal courts have also followed the reasoning set forth in the Eure opinion both as to the use of the ECOA violation as a defensive mechanism to avoid liability under the guaranty altogether and as to the use of the defense past the two year statute of limitations. See Silverman v. Eastrich Multiple Investor Fund, L.P., 51 F3d 28 (CA3 1995) and Integra Bank v. Freeman, 839 F Supp 326, 329 (ED Pa 1993)("To permit creditors--especially sophisticated credit institutions-- to affirmatively benefit by disregarding the requirements of the ECOA would seriously undermine the Congressional intent to eradicate gender and marital status based credit discrimination.")

Risk Minimization

Compliance with the ECOA and Regulation B doesn't seem to involve rocket science. What is disturbing about many of the cases is that loan officers continue to violate the spousal guarantee rules years after those rules were adopted. Risk minimization in this area requires loan officers to be trained and for compliance officers at the institution to follow up and make sure that loan officers don't backslide when they actually begin making loans.

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Copyright (C) 1995, Gerald Blanchard
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