The Equal Credit Opportunity Act (ECOA) makes it unlawful for any creditor "to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status." The statute was designed to prevent, in part, creditors from refusing to grant a wife's credit application without a guaranty from her husband. However, one must be an "applicant" for the statute's protections to apply. While Congress defined "applicant," the Federal Reserve Bank expanded the definition by regulation to include guarantors. Is that regulation entitled to deference under the familiar Chevron two-step framework? The question is important because it determines the scope of the ECOA.
The two courts of appeals that have squarely addressed this issue have reached opposite conclusions. Earlier this year, the Sixth Circuit in RL BB Acquisition, LLC v. Bridgemill Commons Development Group enforced the regulation, effectively expanding the scope of the ECOA. According to the Sixth Circuit, because the ECOA does not specify whether a guarantor qualifies as an applicant, and because the Federal Reserve's interpretation — that a guarantor is a credit applicant — is reasonable in light of the statute, the Federal Reserve's definition is entitled to deference and therefore enforceable.
Recently, the Eighth Circuit in Hawkins v. Community Bank of Raymore expressly disagreed with the Sixth Circuit. In that case, the plaintiffs, two wives, alleged that Community Bank required them to execute guaranties securing loans to a company that their husbands owned solely because they are married to their respective husbands. The plaintiffs claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA, so their guaranties were void and unenforceable. Community Bank moved for summary judgment. The trial court granted the motion, holding that the plaintiffs, as guarantors, were not "applicants" within the meaning of the ECOA. As such, Community Bank could not violate the ECOA by requiring the plaintiffs to execute guaranties.
The Eighth Circuit affirmed. At Chevron step one the court held that the plain language of the ECOA provides that a person is an applicant only if she requests credit. A guarantor does not request credit, but rather assumes a secondary, contingent liability on behalf of the person requesting credit. So, a guarantor cannot be an applicant under the ECOA. As a result, a guarantor is not protected from marital-status discrimination by the ECOA.
The Supreme Court may intervene to resolve this circuit split. Until then, it may be prudent for creditors outside of the Eighth Circuit to assume that the Sixth Circuit rule applies to avoid potential liability under the ECOA.
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