The U.S. Court of Appeals for the Sixth Circuit recently held that an alleged violation of the federal Equal Credit Opportunity Act may be asserted as an affirmative defense of recoupment. In so ruling, the Court also held that the broader definition of “applicant” under Regulation B allows a guarantor to sue under ECOA’s spouse-guarantor rule.
A copy of the opinion is available at: Link to Opinion
A borrower refinanced various loans with a lender, with both the borrower and his spouse ("spouse") executing a personal guaranty. When the related note became due, the lender's successor filed suit, alleging among other things breach of the guarantee by the spouse. The spouse moved for summary judgment in her favor, arguing that the guarantee was unenforceable because it allegedly violated the federal Equal Credit Opportunity Act and Regulation B, 12 C.F.R. Sec. 202.7(d), 12 C.F.R. Sec. 1002.7(d).
The lower court disagreed, and found in favor of the plaintiff. The spouse appealed.
As you may recall, Regulation B prohibits a creditor from requiring an applicant's spouse to guarantee a credit instrument, even if the creditor requires someone to execute a guaranty. See id. Only applicants have standing to sue for ECOA violations. 15 U.S.C. Sec. 1691(e). However, "applicant" is defined differently in the ECOA and Regulation B: the former does not explicitly include guarantors, while the latter allows guarantors to sue for violations of the spouse-guarantor rule. See id.; 12 C.F.R. Sec. 202.2(e), 12 C.F.R. Sec. 1002.2(e).
On appeal, the Sixth Circuit first considered whether Regulation B's definition of "applicant" was entitled to deference. The Court answered this question in the affirmative. It began by reciting the familiar rule that where Congress was silent or a statute is ambiguous as to an issue at hand, an agency's implementing regulation will be granted deference where the agency's answer is based on a permissible construction of the statute. See Chevron, U.S.A. Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984).
The Sixth Circuit then scrutinized the ECOA, noting that it defines "applicant" as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit..." 15 U.S.C. Sec. 1691a(b). Further, "credit" is defined as "the right granted by a creditor to a debtor to defer payment of debt..." 15 U.S.C. Sec. 1691a(d).
The Sixth Circuit reached that conclusion because it read the above definitions to provide that, although it is an "applicant" who requests credit, it is a "debtor" who reaps the benefit - such that "the applicant and the debtor are not always the same person." The Court therefore reasoned that if the applicant and the debtor are not always the same person, "it would be reasonable to conclude that the applicant could be a third party, such as a guarantor."
The Court therefore determined that the ECOA's definition of "applicant" is ambiguous, because it "could be read to include third parties who do not initiate an application for credit..."
Due to that ambiguity, the Sixth Circuit held that Regulation B's definition of "applicant" was valid, and that a guarantor can seek relief for violations of the spouse-guarantor rule.
Next, the Court turned to the question of whether a spouse-guarantor can assert an affirmative defense of recoupment. The Sixth Circuit again answered in the affirmative, noting that "[w]e see no command in ECOA or Regulation B to deny defendants the ability to assert a violation as a recoupment defense." The Court further observed that prohibiting a recoupment defense could undermine Congressional intent to "eradicate gender and marital status based credit discrimination."
Accordingly, the Sixth Circuit reversed the lower court's conclusion that the spouse cannot raise an affirmative defense of recoupment, vacated the lower court’s ruling granting summary judgment to the lender's successor, and remanded the matter for further proceedings consistent with its opinion.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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