Collections: Equal Opportunity Credit Act

Debtors utilize the Equal Opportunity Credit Act, 15 U.S.C. §1691 ("the ECOA" or "the Act"), to avoid adverse action against them on seemingly valid creditor suits. The litigation that has arisen gives good cause to review lending policies for ECOA compliance.

The ECOA was enacted in 1974 to prohibit discrimination by lenders on the basis of race, color, national origin, sex, marital status, age, religion and welfare status. The statute was originally aimed at discrimination against married women who were often denied credit unless they could get their husband's signatures. The statute, in many respects, has been taken to many illogical extremes.

Lenders who violate the statute can be sued for actual damages, punitive damages up to $10,000, and costs and attorney's fees. Punitive damages can be awarded even if there are no actual damages, and even if the lender did not have a specific intention to discriminate. In practice, this means that the Act could be used in a counterclaim, not just a defense. In regard to a counterclaim, there is a two year statute of limitations for suits under the Act, which will usually have passed by the time a legal action by the creditor has begun. Most courts have ruled that the two year statute of limitations does not apply when the Act is raised as a defense.

There are many potential issues that have been raised under the Act; listed below are those which have been cited most frequently.

1. Requiring the signature of a spouse. Under federal regulations, "[A] creditor shall not require the signature of an applicant's spouse ... on any credit instrument if the applicant qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested."(12 C.F.R. §202.7(d)(1).). There have been many cases litigated regarding this. The Virginia Supreme Court found that a bank violated the Act when a husband sought a loan for his construction company and the bank required his wife's signature as a guarantor, even though the husband was individually creditworthy, the wife had no interest in the company and was not a joint applicant, and the bank made no inquiry into her credit standing. The Court made these factual findings, but the company, ultimately, did not have assets to cover the debt. When the husband's construction company defaulted on the loan, after the husband died, the bank sought recovery from the wife and the husband's estate. When the Court found that this violated the Act, it ruled that there could be no recovery against the wife, as "Contracts executed in violation of law cannot be enforced....To deny [the wife] the right to use the ECOA violation defensively would be to enforce conduct that is forbidden by the Act." Debtor's attorneys are using this defense in foreclosure proceedings to prevent summary judgment on the foreclosure, stall for time, release a spouse from liability, and force the lender to defend against a complex and expensive federal claim.
2. Asking for information about a spouse or former spouse, unless the applicant is relying on the spouse's income or lives in a community property state (Virginia is not - it is a Common Law state).
3. Asking for sources of an applicant's income without saying that the applicant does not have to mention alimony or child support unless he or she wants the lender to consider it when it decides whether to extend credit.
4.  Taking race, sex or national origin into account when making a credit decision (although a bank can consider immigration status).
5. Using statistics to judge the reliability of income from alimony, child support, pensions or welfare. Even if child support payments are statistically unreliable, a bank must consider whether the individual applicant has consistently received payments in the past.
6. Ascribing a negative value to an applicant's age unless it relates to a "pertinent element of creditworthiness," such as the length of time the applicant has until retirement or the adequacy of security where a mortgage term exceeds the applicant's life expectancy.
7. Requiring certain types of life insurance before issuing a loan.
8. Basing a credit decision on the area in which the applicant lives, such as the fact that a white applicant lived in a largely black area. 
9. Changing the terms of a credit account without notifying the borrower within 30 days and including a boiler plate notice concerning the borrower's rights under the ECOA.
10. Asking about an applicant's intentions to have children.
11. Asking for the applicant's title (Mr., Mrs., Ms., etc.) without stating that providing this information is optional.

There are also many potential defenses that have been raised by lenders; listed below are those which have been cited most frequently.

1. Voluntary signatures are okay. Although a spouse cannot be required to co-sign a note, voluntary signatures are okay. Thus, the lender can win if it can show that the spouse's signature was voluntary.
2. One spouse was not enough. A lender can argue that the applicant's spouse did not satisfy it's credit criteria all alone, and the other spouse's assets figured into his loan decision, which is why the other spouse's signature was required.
3. Both spouses are principals. If both spouses are principals in a business, the lender can argue that it required both of their signatures because of their business relationship rather than their marital status.
4. Pre-1986 guarantors. ECOA regulations were expanded to include guarantors as of October 1, 1986. Courts have been split as to whether they apply to guarantors if a bank violated the Act before that date but renewed the note after it.
5. Good Faith. A lender is not liable if it acted in good faith compliance with the Federal Reserve Board's "official staff interpretation" of the ECOA, which can be found at 12 C.F.R. §202.

The City of Richmond Circuit Court denied an ECOA defense pled by a wife who had signed a broad release when the loan was refinanced. The case was Richmond Lotco L.P. v. Perrowville Dev. Corp.

In Perrowville the lender obtained a guaranty and general release of claims from four directors of a real estate development company and their wives. The release was included in the modification of an existing loan that the lender had purchased from the Resolution Trust Corp. after the original lender, a bank, went into receivership. The release stated that the borrowers and guarantors would release the note holders "from any and all claims, losses, liabilities, causes of action of any king whatsoever, if any, whether existing or contingent, known or unknown, matured or unmatured, that the borrowers or guarantors may now have or have had in whatever capacity against the noteholder...".

When the successor lender brought a collection suit under the modification, the wives claimed that they were not involved in the business and that their guaranties had been required solely as a result of their marital status, in violation of the ECOA. The wives argued that the ECOA gave them both a defense to the collection action and a counterclaim against the lender. The lender argued that the release was part of the consideration that the lender received for continuing to finance the development project under the modification. The Court ruled in favor of the lender, stating that the modification agreement did not constitute a violation of the ECOA and that therefore the wives could not pursue either a defense or a counterclaim.

The litigation that has arisen gives good cause to review lending policies for ECOA compliance. Please call us if you have any questions.

Foreclosure: Right to Cure a Default

Question: Once a borrower is in default, can he “reinstate the loan”, or, “cure the default” and stop the foreclosure sale? 

Answer: Yes. In general, most deeds of trust contain language that allows a borrower the opportunity to reinstate, or cure, the loan after the due date set out in the note. If the deed of trust contains this language, the note cannot be placed into default and accelerated until the cure period has expired. Government loans such as Fannie Mae and Freddie Mac have very specific requirements. In fact, a borrower can always cure a monetary default and stop a foreclosure up to the time of sale by paying in full, in good funds, the deficient amount, including all costs of the sale.

Real Estate: The Virginia Property Owners’ Association Act – An Introduction

The Virginia Property Owners’ Association Act provides homeowner’s associations with additional protections when homeowners fail to pay their dues; it also defines responsibilities of the association. Accordingly, homeowner’s associations should be knowledgeable of the Act and its provisions. The Act applies to developments subject to a declaration recorded after January 1, 1959, associations incorporated or otherwise organized after such date, and all subdivisions created under the former Subdivided Land Sales Act. In the next issue of Creditor News, I will briefly introduce this Act and some of the special duties it imposes on homeowner’s associations.  Subsequent issues will address memorandum of liens and foreclosures. 

Bankruptcy: Homestead & Poor Debtor Exemptions, Rental Property

In the case of In re: Latham the United States Bankruptcy Court at Roanoke, Virginia ruled that Virginia debtors who had a North Carolina beach house could not claim their beach house furniture in North Carolina exempt under the "household furnishings" provision of the Virginia poor debtor's exemption in Virginia Code §34-26.

The Bankruptcy Trustee had filed an objection to the debtor's exemption claim that the furniture had a value of $9,200.00. The Bankruptcy Trustee took the position that the miscellaneous beach furniture was not household furniture because it was not located in the debtors' household and constituted personal property located on a property used by the debtors to generate income.

The Bankruptcy Court in Latham found that the miscellaneous beach furniture did not fall within the statutory phrase "household furnishings" found in Virginia Code §34-26 (4a). The Bankruptcy Court noted that there were no published decisions that defined the term "household furnishings" from Virginia Code §34-26 (4a). The Bankruptcy Court stated that the meaning could be determined by the examination both of the statute itself and the definition of household furnishings in Black's Law Dictionary. In regard to the statute, the Bankruptcy Court noted that the statute gives examples of household furnishings which the legislature intended to set aside for the benefit of the debtors and their families. The examples cited by the legislature in the statute point toward items that debtors can retain and use in order to facilitate their fresh start. The common definitions indicate a necessity that the furnishings be in the household and used by the householder or his family. The Bankruptcy Court noted that the purpose of the pertinent statute is to protect debtors and their families from being destitute by the creditor process. Accordingly, the Bankruptcy Court found that the term "household furniture" in Virginia Code §34-26 (4a) meant "those items of furniture which are typically found in or around the home of debtors and are used by debtors and their dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself." With this being the case, the Bankruptcy Court found that the debtors in Latham intended to use their beach house as a place to go on vacation only when it was not rented. In order to finance construction, the debtors built the house with the primary intent to rent it out during peak season. The Bankruptcy Court found that the beach house was not the type of "home of the debtors" contemplated by the definition. Accordingly, the Bankruptcy Court sustained the Bankruptcy Trustee's objection to this claimed exemption.

The Bankruptcy Trustee also objected to the debtor's claim for $3,000.00 in rental income on the property. As to this property, the Bankruptcy Trustee took the position that the debtors were required to file their homestead deed in North Carolina at the situs of the real property in order to perfect their claimed exemption in the rental income. The Bankruptcy Trustee was unable to cite authority in support of his position, however. Accordingly, the Bankruptcy Court ruled that the income was properly claimed and the exemption was properly perfected by the recordation of the homestead deed in Washington County, Virginia, and the Bankruptcy Trustee's objection to the claimed exemption was denied.