Page 11 - John Hundley 2015

Banking Law Roundup

Sharp Thinking

No. 130 Perspectives on Developments in the Law from Sharp-Hundley, P.C. June 2015

Courts Split On Whether Guarantors Are

“Applicants” Under Credit Opportunity Act

By John Hundley, John@sharp-hundley.com, 618-242-0200
Rejecting a contrary Federal Reserve Board regulation and cases thereunder, the Eighth Circuit U.S.
Court of Appeals has held that it does not violate the Equal Credit Opportunity Act (15 U.S.C. § 1691 et seq.)
(ECOA) for a lender to require wives to guarantee debts of their husbands’ businesses.
Ruling in Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014), the
court rejected 12 C.F.R. § 202.2(e) and RL BB Acquisition, LLC v. Bridgemill Commons
Dev. Grp., 754 F.3d 380 (6th Cir. 2014), both holding that guarantors are “applicants”
under the act.

The court rejected § 202.2(e)’s provision that the term applicant “includes guarantors”
on the basis that it was contrary to clear statutory provision. Citing Webster, the court said
that to “apply” means “to make an appeal or request esp[ecially] formally and . . . usu[ally]
for something to benefit to oneself.” “[A] person does not, by executing a guaranty, request
credit . . . and therefore cannot qualify as an applicant under the unambiguous text of the ECOA,” the court
said.
The court said its result did not offend the purpose of the act, which was to curtail
the practice of lenders denying a wife’s application for credit in her own name. “By
requesting the execution of a guaranty, a lender does not thereby exclude the
guarantor from the lending process or deny the guarantor access to credit,” it said.
Hawkins’ ruling that § 202.2(e) is contrary to the plain terms of
the statute is important because agencies’ interpretations of statutes
usually are subject to deference if Congress was silent or
ambiguous on the question at hand. Reaching a result contrary to Hawkins, another court
of appeals just two months earlier reasoned that guarantors arguably were “applicants”
under ECOA (and § 202.2(e) thus was a permissible regulatory action) because “a
guarantor does formally approach a creditor in the sense that the guarantor offers up her
own personal liability to the creditor if the borrower defaults. . . . [T]he test could just as
easily encompass all those who offer promises in support of an application – including
guarantors, who make formal requests for aid in the form of credit for a third party.” RL
BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir. 2014).
In the Seventh Circuit, most courts facing the issue have been guided by Moran Foods, Inc. v. Mid-
Atlantic Market Dev. Co., 476 F.3d 436 (7th Cir. 2007), which said the statute was unambiguous and
guarantors were not applicants for credit. However, other courts have treated that passage of Moran as non-
binding dictum and deferred to § 202.2(e).

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking shall be
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contact a Sharp-Hundley lawyer at 618-242-0200 or one of the addresses provided on page 2 of this newsletter.