Equal Opportunity Credit Act—Part 2

    Last month we began a review of The Equal Opportunity Credit Act. This month we will look at 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 me at 545-6250 if you have any questions.  Eddie.

Default

    Question:  When is a loan in default?  Answer:  Under one or more of several circumstances.  The most common way that a borrower is in default is monetary – e.g., the borrower fails to make a required payment.  However, default can be for a non-monetary reason as well, such as:

1. Failure to pay taxes.
2. Failure to pay insurance.
3. Failure to remove or bond over mechanic’s liens.

Failure to perform requirements unique to the loan.

     If you have questions about default, please call Eddie at 545-6251.

Using Real Estate as a Collection Tool

    Collecting money owed can be a job.  Having more tools to do the work is good!  Securing your debt with real estate is a great tool.  In future weeks we will explore ways that use this tool.  Articles will include such topics as: Deeds of Trust, Foreclosure, Docketing Judgments, Lis Pendens, Recording Mechanic’s Liens, Suits to Enforce Mechanic’s Liens, Foreclosing on Mechanic’s Liens, Recording Homeowners Association Liens, Foreclosing on Homeowners Association Liens and more.

We have experienced attorneys and staff who can examine title, do real estate closings, seek judgment and docket and enforce the same, and prepare and enforce statutory liens, such as those for litigation, homeowner’s associations and mechanic lien situations.  Please call me so that we can discuss how we can help you.

Bankruptcy - What can we do for you

    Creditors need to know that having aggressive representation in bankruptcy cases is just as important as having a good plan.  We can help.  We have aggressive counsel and trained support staff.

In Chapter 7 cases, even in supposedly "no asset" cases, there are concerns about security interests, homestead deeds, fraud and abuse, and reaffirmation agreements.  Our "second opinion" and review of your cases could result in new hope for otherwise hopeless cases.

In Chapter 13 cases there are concerns about amount of assets, manner of funding, percentage payments for unsecured debts and allowable expenses.  Do not assume that the debtor's first plan is set in stone - let us assert your interest.

We would be pleased to meet with you to review your representation needs.  Our work can be done on a flat fee basis, an hourly fee basis, or pursuant to a retainer agreement.

Equal Opportunity Credit Act - Part 1

    In the next weeks we will begin a review of The Equal Opportunity Credit Act.  Over the last few years debtors have been utilizing 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.

In the next weeks we will look at potential defenses that have been raised by lenders.