The Equal Credit Opportunity Act

Spousal Guarantees and Releases

Your credit application includes a form personal guarantee, that includes a spouse's guarantee. Given the downturn in the economy, you insist that the president and her husband of the corporation you are selling on credit sign the joint personal guarantee. You also obtain a spousal release of claims under the Equal Credit Opportunity Act (ECOA). You authorize the first-time credit sale to the corporation, and the corporation fails to pay. You make demand on the president and the spouse to honor the guarantee. They refuse and you sue on the guarantee. The spouse raises as a defense to pay on the guarantee that your company has violated the ECOA, notwithstanding the release. The spouse claims that the corporation was independently creditworthy, and was not involved with the business.

You are looking for ways to make the sale, but reduce the credit risk and personal guarantees may achieve this. But how can ECOA affect your taking a personal guarantee? Will a court honor a spousal release contained in the guarantee in the face of an ECOA claim? A state appellate court recently considered the interplay of ECOA, a spousal guarantee and spousal release, and is instructive for the credit professional.

What Is ECOA?

ECOA was enacted by Congress in 1989, and the Federal Reserve Board issued Regulation B to implement ECOA in 1990. ECOA is a federal statute that prohibits credit grantors from discriminating in the granting of credit based on a prohibited basis, including race, color, religion, national origin, gender, marital status or age.

As ECOA is a federal statute, it applies to all states. ECOA is intended to promote the availability of credit without regard to characteristics that have nothing to do with creditworthiness. Creditors are required to notify applicants of action taken on their applications, and to retain records of credit applications.

ECOA's prohibitions against discrimination are aimed primarily at the evaluation of a credit application by a credit grantor. The general rule is that a credit grantor may consider any information it obtains in evaluating whether to extend credit so long as the information is not used to discriminate against an applicant on a prohibited basis.

Obtaining A Spousal Guarantee

ECOA also bars a vendor demanding a guarantee from a spouse unless a vendor first determines that the applicant, say a corporation, does not qualify for the credit on its own. ECOA also does not permit a vendor to require a spouse to co-sign a personal guarantee if that spouse is not directly involved with the applicant. Unless the vendor can show that the applicant, say a corporation, is independently creditworthy, or that the spouse was involved in the applicant's business, the vendor may not condition the sale on the spouse being a coguarantor.

ECOA Release Upheld

The facts supporting the Appellate Court's opinion is that the applicant, a partnership, requested credit. The spouse, who was not involved in the business, guaranteed the debt. The creditor obtained the spousal guarantee as a condition to restructuring the delinquent account as the husband did not have sufficient personal assets to cover the credit. The spouse also agreed to release the creditor from all claims relating to the credit. The partnership defaulted on the credit. The creditor sued the spouse on the guarantee when the debt was not paid.

The spouse responded to the creditor's lawsuit by contending that the creditor had violated ECOA and Regulation B as the partnership was independently creditworthy. The spouse contended the guarantee should not be enforced because of the ECOA and Regulation B violation. The Indiana Court of Appeals stated that before it can analyze the spouse's argument it must make a determination as to whether the spouse should be bound by the contract in which she waived her defense.

The Court found in favor of the creditor and against the spouse. The Court stated that there is a long tradition of recognizing and respecting the freedom of individuals to enter into contracts. Additionally, the Court has expressed a commitment to advancing public policy by supporting the enforcement of these contracts. As a general rule the law allows competent individuals the liberty to enter into agreements when done so freely and voluntary and will be enforced by the courts, so long as the contracts are not illegal or against public policy.

When a court reviews a contract that is in dispute, unless the contract is ambiguous (susceptible to more than one interpretation) the court will not consider any extrinsic evidence but rather will look only to the document itself and interpret the intent of the parties based upon the document only. Essentially, the court reviews the plain meaning of the words in the contract.

The Court found that the spouse was a sophisticated party, was represented by legal counsel and further had the opportunity to seek additional legal advice prior to signing the release of claims against the creditor. Additionally, there was no evidence before the court that the bargaining between the parties was anything other than free and open. Thus the Court stated that the guarantee, including the release, was plain and clear. As such, the spouse was bound by the terms of the contract, including the release waiving her right to pursue any claims or demands against creditor.

A Reminder When Taking A Spousal Guarantee

A personal guarantee provided by a company's officer, and spouse, of a corp oration's debt is a method to increase the credit professional's security. However, be mindful of your credit application that includes a form spousal guarantee. ECOA may restrict your taking of this guarantee. If you do take the personal guarantee consider insisting on taking a spousal release. The Indiana Court of Appeals found that even if ECOA may have been violated, the spousal release may allow the creditor to avoid the consequences. A guarantor always looks for ways to escape liability from the guarantee. Don't have an ECOA violation result in your guarantee being ruled unenforceable.

Reprinted by permission from The Trade Vendor Quarterly, Winter 03