Thursday, November 7, 2013

FYI: 4th Cir Affirms Dismissal of ECOA Claims as Waived in Loan Mod Docs

The U.S. Court of Appeals for the Fourth Circuit recently affirmed the dismissal of a borrower's spouse's federal Equal Credit Opportunity Act claims, finding that they were waived pursuant to several loan modification agreements. 


A copy of the opinion is available at


A borrower ("borrower") who owned and operated a food-packing company took out a loan with a bank (the "bank").  The borrower's spouse, who neither owned nor operated the company, was required to sign the loan agreement as a guarantor. 


The borrower later defaulted on the loan several times, each time entering into a loan modification agreement with the bank.  The modification agreements all required both the borrower and his spouse to waive any and all claims against the bank. 


The loan was secured by several assets co-owned by the borrower's spouse.  After the final default, the bank recorded consensual liens on several of these assets. 


The borrower's spouse then filed the instant litigation against the bank, arguing that the bank had violated the Equal Credit Opportunity Act ("ECOA") by requiring her to serve as her husband's guarantor. 


The lower court dismissed the complaint with prejudice, finding that the borrower's spouse failed to state a claim upon which relief could be granted, and also held that the claims were waived. The spouse appealed. 


As you may recall, the 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."  15 U.S.C. Sec. 1691(a)(1) (2006).  Specifically, lenders cannot require a spouse's signature on a loan agreement where the applicant individually qualifies for the requested credit.  12 C.F.R. Sec. 202.7(d)(1) (2013).   


On appeal, the Fourth Circuit began by surveying the applicable statutory scheme. It noted that although the ECOA was enacted to protect married women - whom "many creditors had traditionally refused to consider for individual credit" and that "[n]ot every signature required of a borrower's spouse...constitutes credit discrimination under ECOA." 


The Fourth Circuit then enumerated certain of those exceptions, which include among others an exception permitting lenders to require the non-applicant spouse to sign a loan where the applicant spouse does not independently qualify for the loan.  In addition, lenders may require the signature of a spouse where two spouses co-own property designated as collateral for said loan, to ensure that the collateral is available for to satisfy the debt in the event of default. 


Here, the spouse argued that the bank did not evaluate her husband's independent creditworthiness before requiring her signature on the loan.  In addition, although the spouse "apparently conceded" that the bank could have required her signature for the limited purpose of waiving her rights to the collateral property, she nevertheless contended that the bank was not permitted to require her to provide an unlimited guarantee of the loan. 


The Fourth Circuit acknowledged that the ECOA "appears to prohibit lenders from demanding that a spouse guarantee the full loan without first appraising the borrower's creditworthiness," and further opined that the bank "may well have violated ECOA" by its actions.


Nevertheless, the Fourth Circuit ruled in favor of the bank, on the grounds that the spouse waived her claim in connection with the various loan modification agreements she executed.  Although the spouse argued that lenders should not be able to both violate the ECOA and induce borrowers to waive their ECOA rights at the same time, the Fourth Circuit disagreed.  It noted that the waiver in the loan modification agreements merely provided a "negotiated benefit" to both the bank and the borrowers. 


Accordingly, the Fourth Circuit affirmed the judgment of the lower court.   





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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Admitted to practice law in Illinois


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