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.