Courts Split On Whether Guarantors Are “Applicants” Under Credit Opportunity Act

Banking Law Roundup

Sharp Thinking

No. 130     Perspectives on Developments in the Law from Sharp-Hundley, P.C.    June 2015

Courts Split On Whether Guarantors Are “Applicants” Under Credit Opportunity Act

            By John Hundley, John@sharp-hundley.com, 618-242-0200

            Rejecting a contrary Federal Reserve Board regulation and cases thereunder, the Eighth Circuit U.S. Court of Appeals has held that it does not violate the Equal Credit Opportunity Act (15 U.S.C. § 1691 et seq.) (ECOA) for a lender to require wives to guarantee debts of their husbands’ businesses.

            Ruling in Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014), the court rejected 12 C.F.R. § 202.2(e) and RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir. 2014), both holding that guarantors are “applicants” under the act.

            The court rejected § 202.2(e)’s provision that the term applicant “includes guarantors” on the basis that it was contrary to clear statutory provision.  Citing Webster, the court said that to “apply” means “to make an appeal or request esp[ecially] formally and . . . usu[ally] for something to benefit to oneself.”  “[A] person does not, by executing a guaranty, request credit . . . and therefore cannot qualify as an applicant under the unambiguous text of the ECOA,” the court said. 

            The court said its result did not offend the purpose of the act, which was to curtail the practice of lenders denying a wife’s application for credit in her own name.  “By requesting the execution of a guaranty, a lender does not thereby exclude the guarantor from the lending process or deny the guarantor access to credit,” it said.

            Hawkins’ ruling that § 202.2(e) is contrary to the plain terms of the statute is important because agencies’ interpretations of statutes usually are subject to deference if Congress was silent or ambiguous on the question at hand.  Reaching a result contrary to Hawkins, another court of appeals just two months earlier reasoned that guarantors arguably were “applicants” under ECOA (and § 202.2(e) thus was a permissible regulatory action) because “a guarantor does formally approach a creditor in the sense that the guarantor offers up her own personal liability to the creditor if the borrower defaults. . . .  [T]he test could just as easily encompass all those who offer promises in support of an application – including guarantors, who make formal requests for aid in the form of credit for a third party.”  RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir. 2014). 

            In the Seventh Circuit, most courts facing the issue have been guided by Moran Foods, Inc. v. Mid-Atlantic Market Dev. Co., 476 F.3d 436 (7th Cir. 2007), which said the statute was unambiguous and guarantors were not applicants for credit.  However, other courts have treated that passage of Moran as non-binding dictum and deferred to § 202.2(e). 

Credit Agreements Act Requires Both Signatures On Key Document

            Leaving to another day whether a collection of documents, some of which are not signed by both of the parties, can ever be aggregated to constitute an acceptable writing under § 2 of the Credit Agreements Act (815 ILCS 160/2), the Appellate Court for the Second District has held that that act is not satisfied where “the relevant terms and conditions” of the loan are not discernible from documents that bear the signatures of both the debtor and the creditor.

            Distinguishing the statute of frauds, which requires the signature only of the party to the charged, the court noted that § 2 requires that both parties to the credit agreement sign the document and that it set forth those “relevant terms and conditions.”  Avanti Med. Group, LLC v. BMO Harris Bank, N.A., 2014 IL App (2d) 140401. 

            In Avanti, the plaintiff had signed some routine documents allegedly associated with the alleged credit agreement, but had left unsigned the critical “Summary of Terms and Conditions” document.  Since that document contained the “relevant terms and conditions” required by § 2, its non-signature by plaintiff made it unenforceable under the act, the court said.

Servicer Must Credit Online Payment Authorization Immediately

            A mortgage servicer which collects the mortgagor’s payment electronically from a third-party bank account by receiving payment-specific authorizations to initiate Automated Clearing House (ACH) transfers must credit those transfers to the mortgagor’s mortgage account on the date the authorization is received, the U.S. Court of Appeals for the Seventh Circuit has held.

            In Fridman v. NYCB Mortgage Co., 780 F.3d 773 (7th Cir. 2015), the servicer permitted mortgagors to make payments through its website by authorizing ACH withdrawals thereon.  However, the servicer did not credit the mortgagor’s account until funds were received some two business days later, sometimes resulting in the assessment of late fees. 

            The majority of the Seventh Circuit panel ruled that this practice violated the federal Truth In Lending Act, 15 U.S.C. § 1601 et seq., and Regulation Z issued thereunder.  It analogized online payment authorizations to paper checks, which “must be credited when received by the mortgage servicer, not when the servicer acquires the funds.” 

It distinguished where the mortgagor pre-authorized the third party bank to make the payment, because in that situation the mortgagor was in control of the timing of the transfer.  In contrast, with the authorizations made on the servicer’s website, “it is the servicer that decides how quickly to collect that payment through the banking system . . . . The servicer is in control of the timing, and without the directive to credit the payment instrument when it reaches the servicer, the servicer could decide to collect payment through a slower method in order to rack up late fees.” 

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