November 4, 2013
Authored by: Brian Devling
A recent opinion by the Fourth Circuit Court of Appeals is a good reminder that lenders and lending lawyers must be aware of Regulation B’s limitations on requiring spousal guarantees when underwriting and documenting commercial loan transactions. Regulation B implements the Equal Credit Opportunity Act and, among other things, prohibits creditors from using credit approval and underwriting practices that discriminate on the basis of marital status.
On October 30, 2013, the Fourth Circuit, in Ballard vs. Bank of America, upheld the lower court’s dismissal of a wife’s claims against the bank. The opinion provides a detailed discussion of Regulation B’s requirements and, in dicta, suggests that the bank may very well have violated Regulation B in requiring the wife, Mrs. Ballard, to guaranty a loan to her husband’s business. The court, however, finds the dismissal was proper because Mrs. Ballard waived her claims against the bank.
After the loan was originally made, defaults occurred and the borrower and guarantors waived and released claims against the bank in connection with restructuring agreements. The court found those subsequent waivers and releases were sufficient to waive any claims Mrs. Ballard may have had against the bank for violating Regulation B. This is an interesting (and some may say unfair) conclusion because the only reason Mrs. Ballard had signed the release is because she was a guarantor. Had the bank not required the guaranty in the first place (a supposed violation of Regulation B), Mrs. Ballard would not have been included in the release agreement. Nevertheless, the court did not agree that the initial violation which started the chain of events prevented the release from being effective.
While it is good to know, from a lender’s perspective, that mistakes can be erased with a release of claims, the better takeaway from this case is to ensure compliance with Regulation B when initially considering a guaranty requirement.
The Ballard vs. Bank of America decision can be read on the Fourth Circuit’s website here.