March 25, 2016
Authored by: Jerry Blanchard
In what goes for kicking the can down the road at the Supreme Court, the Court has evenly split on an appeal arising from the Eight Circuit Court of Appeals decision in Hawkins v. Community Bank of Raymore, 761 F3d 937 (CA8 2014) where that court found that the Federal Reserve had overstepped its bounds in adopting rules under the Equal Credit Opportunity Act to protect spousal guarantors. The case arose out of a series of loans in 2005 and 2008 made by the Bank—totaling more than $2,000,000—to PHC Development, LLC to fund the development of a residential subdivision. In connection with each loan and each modification, the principals of the LLC and their spouses (who had no interest in the LLC) executed personal guaranties in favor of Community to secure the loans.
The spouses defended themselves in an action brought by the bank on the basis that Community had required them to execute the guaranties solely because they were married to their respective husbands. They claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA.. the federal district court concluded that the spouses were not “applicants” within the meaning of the ECOA and thus that Bank had not violated the ECOA by requiring them to execute the guaranties. Accordingly, the district court granted summary judgment in favor of the Bank on the ECOA claim and on the ECOA-based affirmative defense to the Bank’s breach-of-guaranty counterclaims.
The 8th Circuit affirmed the lower court decision and held that the plain language of the ECOA provides that a person is an applicant only if he or she requests credit. In their view, executing a guaranty does not constitute a request for credit. The decision is in direct opposition to a number of other appellate decisions where courts have found that the Reg B spousal guaranty rule is valid and offers aggrieved spouses a defense.
When the Supreme court agreed to hear the case last year there was great hope that banks would get some guidance as to whether the 8th Circuit’s approach was in fact the correct one or whether the previously held view that spouses guarantors were protected would continue to be the governing approach.
The Supreme Court, in a split decision rendered without an opinion, affirmed the 8th Circuit decision. The odd situation we find ourselves in right now is that if a case from another circuit which reached an opposing position had made its way to the Supreme court, the result would have been the same, an evenly divided court with the decision affirmed. Thus, banks operating in the 8th Circuit are free to ignore the Federal Reserve’s guidance regarding spousal guaranties. Should banks operating in the 4th and 6th Circuits where the spousal guaranty rule has been upheld continue to operate as they have in the past? What happens if you are a bank that has operations in different circuits? Do we really know what would have happened if Judge Scalia had still been on the court? Can we predict what his replacement would have done?
A fair number of commentators have suggested that Justice Scalia would have ruled in favor of upholding the 8th Circuit holding that the Federal Reserve had exceeded its authority in writing the spousal guaranty rule. I don’t know that one can assume that his replacement, regardless of who appoints them to the court would follow Justice Scalia’s bent. Thus, a bank is faced with the practical problem of how to minimize legal risk in a very uncertain environment. I think that many banks outside of the 8th Circuit will probably find that “staying the course” and assuming that the spousal guaranty rule is still valid runs the least risk of potential liability. Likewise, banks that operate in different states will probably choose to do adopt the same course of action. Banks already have policies and training materials that assume the spousal guaranty rule is valid, do you really want to try and train loan officers to remember that the rule applies if you are making a loan in Tennessee but not in Missouri? I think bi-furcating the training and policies creates the potential of more violations in those jurisdictions where the courts have upheld the rule.
At least for the time being, Banks located within the 8th Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota) are free to operate as if the spousal guaranty rule no longer applies. Will that continue to be the case? The current Congress would probably not support the Federal Reserve’s interpretation of the ECOA on this issue. Would a Congress controlled by Democrats do so? Will the Supreme Court be presented with another case after Justice Scalia’s replacement is named? Will his replacement agree with the 8th Circuit or not? Will the Federal reserve attempt to revise Reg B? Will the CFPB attempt to get involved?
Bankers in all jurisdictions should continue to keep an eye out for judicial, legislative and regulatory developments in this area. The last chapter is yet to be written!