Hawkins v. Community Bank of Raymore

Issues 

  1. Do loan guarantors have the same rights and protections that their applicant spouses are given by the Equal Credit Opportunity Act?
  2. Does the Federal Reserve Board have the authority to define guarantors as applicants for purposes of the Equal Credit Opportunity Act?
Oral argument: 
October 5, 2015

 

The Supreme Court will consider whether protections for applicants in the Equal Credit Opportunity Act (“ECOA”) also extend to spouses who sign guaranties, and whether the Federal Reserve Board (the “Fed”), in promulgating Regulation B, permissibly expanded the definition of “applicant” in the ECOA to include such guarantors.  The loan guarantors in this case (Hawkins and Patterson) maintain that ECOA’s protections for applicants extend to guarantors, because the ECOA does not explicitly exclude them, and Regulation B clarifies that the ECOA definition of applicants includes guarantors.  Accordingly, Hawkins and Patterson assert that they have standing to sue to invalidate the loan agreement as illegal and unenforceable under ECOA.   Raymore, the creditor here, counters that the plain language of the ECOA protects only applicants, not guarantors.  Raymore contends that any attempt by the Fed, through Regulation B, to expand the definition of “applicant” in the ECOA to include guarantors was impermissible.  The Supreme Court’s  decision in this case  could affect the cost of borrowing and change the underwriting standards and costs for loans to married business owners.

Questions as Framed for the Court by the Parties 

  1. Whether “primarily and unconditionally liable” spousal guarantors are unambiguously excluded from being Equal Credit Opportunity Act applicants because they are not integrally part of “any aspect of a credit transaction”; and
  2. Whether the Federal Reserve Board has authority under the ECOA to include by regulation spousal guarantors as “applicants” to further the purposes of eliminating discrimination against married women.

Facts 

This case begins with a loan dispute between Valerie Hawkins and Janice Patterson, as guarantors, and the Community Bank of Raymore, (“Raymore”), as creditor Hawkins and Patterson’s husbands are the only two members of PHC Development, LLC (“PHC”), a Missouri limited liability company Between 2005 and 2008, Raymore made four loans to PHC, totaling more than $2,000,000.   Hawkins, Patterson, and their husbands, in connection with each loan (and multiple modifications of each loan), executed personal guaranties in favor of Raymore. In April, 2012, when PHC failed to make payments due, Raymore declared the loans to be in default and demanded payment in full from PHC, and Hawkins and Patterson as guarantors. 

Hawkins and Patterson then filed suit against Raymore in the Federal District Court for the Western District of Missouri (“Missouri District Court”), seeking damages and an order declaring that their guaranties were void and unenforceable.  In their complaint, Hawkins and Patterson alleged that Raymore, in violation of the Equal Credit Opportunity Act (“ECOA”), had required them to sign the guaranties solely because of their status as spouses of their husbands.  Raymore filed counterclaims based on Missouri state law, including claims for breach of the guaranties.  

The Missouri District Court granted summary judgment in favor of Raymore on Hawkins and Patterson’s ECOA claim and on Raymore’s breach-of-guaranty counterclaims.  In granting summary judgment, the District Court found that Hawkins and Patterson were not “applicants” as defined by the ECOA, and thus, that Raymore was not prohibited from requiring Hawkins and Patterson to sign the guaranties. In April, 2014, Hawkins and Patterson appealed both the summary judgment and denial of jury trial to the Eighth Circuit

In their appeal, Hawkins and Patterson argued that the Missouri District Court should have given deference to Regulation B, promulgated by the Federal Reserve Board (“Fed”), which expands the definition of “applicant” in ECOA to include guarantors.  The Eighth Circuit, in determining whether to defer to the Fed’s definition of “applicant,” applied the Supreme Court’s two-step analysis known as Chevron deference Under Chevron, courts defer to agency interpretations of federal statutes when the statute is ambiguous and the agency interpretation is not unreasonable.  Using the Chevron framework, the Eighth Circuit ruled that the meaning of the word “applicant,” as used in ECOA, was not ambiguous. The Eighth Circuit thus declined to defer to the Fed’s expanded definition of “applicant” in Regulation B, and accordingly, affirmed the Missouri District Court’s grant of summary judgment in favor of Raymore.  Hawkins and Patterson subsequently petitioned the Supreme Court for a writ of certiorari, which the Court granted on March 2, 2015. 

Analysis 

In this case, the Supreme Court will decide (1) whether spousal guarantors have statutory standing to sue as applicants under ECOA, and (2) whether the Fed had authority to clarify that the definition of applicant in ECOA.  Hawkins and Patterson argue that the ECOA’s purpose and context indicates that an “applicant” includes a “guarantor,” and that the Fed’s Regulation B clarified the definition.  Raymore counters that a plain reading of the statute excludes guarantors from the definition of applicant.    Raymore contends that the Fed’s clarification of the meaning of “applicant” was not a permissible interpretation, because it was not consistent with the plain meaning of the statute or Congress’s intention. 

IS A SPOUSAL GUARANTOR AN “APPLICANT” UNDER ECOA?

Hawkins and Patterson argue that Congress intended for the word “applicant” in ECOA to include spouses acting as guarantors, based on a consideration of the statute’s purpose and context.  Hawkins and Patterson explain that ECOA protects applicants against creditor discrimination. Because a narrow reading of the word “applicant” would allow for discrimination based on marital status, they contend such a reading is not consistent with the statutory scheme.  Furthermore, Hawkins and Patterson argue, ECOA defines “applicant” as any person who applies for credit, and defines “credit” as a right granted by a creditor to a “debtor” to defer payment of debt. Since the spousal guarantors were debtors under a plain language interpretation, Hawkins and Patterson maintain that they fall within the broad scope of people who are “applicants.”  Lastly, Hawkins and Patterson argue that spousal guarantors have alternative statutory standing as applicants because they fall within the ECOA’s protected “zone of interests,” which includes the elimination of marital status discrimination in credit transactions.   

Raymore counters that Congress defined “applicant” in ECOA as one who “applies” for credit “directly.”  Raymore reasons this plain meaning does not include a “guarantor,” and cautions that courts should not go looking for idiosyncratic meanings.  Raymore further argues that the definition of application is unambiguous, both on its face and within the context of the statute, and that judicial inquiry into statutory interpretation ends when the statute’s language is unambiguous. 

DID THE FED HAVE AUTHORITY TO INTERPRET THE DEFINITION OF “APPLICANT”?

Hawkins and Patterson contend that Congress explicitly granted the Fed power to clarify through regulation any ambiguity in ECOA, and that the Fed properly exercised this power in Regulation B.  Hawkins and Patterson explain that under Chevron, any ambiguity left by Congress in a statute for an agency to fill is an “an express delegation of authority” for the agency to clarify the specific provision of the statute through regulation. Since Congress has stated that one purpose of the ECOA is to eliminate marital status discrimination in the extension of credit, Hawkins and Patterson argue, the Fed’s interpretation that spousal guarantors are protected under the ECOA as “applicants” is both reasonable and within its authority and discretion. Thus, Hawkins and Patterson conclude that the Court should defer to the rational interpretation of the Fed, because it exercised Congressionally granted authority to implement and enforce ECOA.  

Raymore argues that under Chevron, courts should first look to a statute’s plain and ordinary meaning as written by Congress unless the statute’s language is ambiguous. Raymore asserts that the meaning of applicant in the ECOA clearly excludes guarantors, and thus controls the Court’s interpretation. Furthermore, Raymore contends that any agency interpretation of statutory language must be consistent with the expressed intent of Congress, but the Fed’s definition is not. Raymore explains that the Fed acknowledged it was making a “substantive change” to the statutory definition of applicant in the 1985 amendment to Regulation B, and not merely an administrative interpretation that would be entitled to Chevron deference. Raymore notes that the Fed explained that it added guarantors to the definition of applicant in order to grant legal standing to guarantors whose signature had been illegally required.  Even after the 1985 amendment, Raymore maintains, the Fed continued to distinguish between a guarantor and an applicant in its interpretations. 

Discussion 

This case presents the Supreme Court with an opportunity to resolve a circuit split and to decide whether the plain language of ECOA protects applicants but not guarantors; and whether the Fed, in promulgating Regulation B, permissibly expanded or clarified the definition of “applicant” in the ECOA to include guarantors.  Hawkins and Patterson maintain that the ECOA does not explicitly exclude guarantors, and that any ambiguity was permissibly clarified by Regulation B.  Raymore counters that the ECOA protections explicitly extend only to applicants, and that any attempt by the Fed to expand the definition of “applicant” in the ECOA to include guarantors was impermissible.  

The Supreme Court’s decision in this case may affect the amount of ECOA litigation, increase the cost of borrowing, and change the underwriting standards and costs for loans to female business owners. 

LOAN LIABILITY AND COST OF BORROWING

The United States, in support of Hawkins and Patterson, argues that extending applicants’ protections under ECOA to guarantors does not “unduly expand” lender liability.  The United States argues that even if guarantors are treated as applicants under ECOA, courts do not always allow guarantors to raise defenses under ECOA. Moreover, the United States notes that “excluding guarantors from the definition of ‘applicant’ would not necessarily prevent the invalidation of a guarantee obtained in violation of the Additional Parties Rule.” Either a federal regulatory agency could require release of an improper guaranty, or the applicants themselves could file suit to void a guaranty, independent of any action by the guarantor.  

Several bankers’ associations, in support of Raymore, argue that expanding the definition of “applicants” to include spousal guarantors could expose lenders to added risk of litigation by those guarantors. As a result, the bankers’ associations argue, lenders may shy away from extending loans to married business owners, because of the risk a spousal guarantor may later decide to sue the lender for discrimination under ECOA. Or, lenders may forgo a spousal guaranty but pass the risk (and cost) of the unguaranteed loan on to the borrower.  Hence, the bankers’ associations argue that the expanded definition would make it more difficult for married business owners to obtain loans.  The bankers’ associations also contend that Congress could not have intended this result, as its goal was to “to protect women who ‘applied’ ‘directly’ for credit.” The associations argue that giving spousal guarantors the right to sue for discrimination under ECOA would do nothing to further Congress’ intent. 

LOANS AND FEMALE SMALL-BUSINESS OWNERS

The United States argues that if guarantors are not considered applicants under the ECOA, married women could be financially ruined by their spouses’ failed businesses, and thus unable to obtain loans for themselves.  According to the United States, the purpose of ECOA was to protect married individuals’ credit and access to financing from a spouse’s business failures, and that a failure to protect spousal guarantors undermines this intent.  Hawkins and Patterson also warn that limiting the ECOA’s protections to only applicants renders the ECOA meaningless, enabling lenders to discriminate based on race, gender, marital status, age, or religion, so long as such discrimination is not directed towards the actual borrower.  The United States adds that the Fed was granted broad authority to enact regulations to prevent just such an outcome, and it promulgated Regulation B under that authority. 

The bankers’ associations argue that lenders often obtain signatures from spousal guarantors not for any discriminatory purpose, but because marital assets may be the only assets available to the applicant that can serve as collateral for the prospective loan.  The associations contend that permitting spousal guarantors to challenge the validity of their guaranties under ECOA will likely result in married small-business owners being unable to obtain commercial loans.  The associations argue that a ruling in favor of Raymore would not encourage discriminatory lending practices, but would simply prevent Hawkins and Patterson from asserting a cause of action that Congress intended only for applicants.  Raymore adds that that Hawkins and Patterson’s allegations suggesting that they were “hapless, unsophisticated wives of borrowers” contradict the very anti-discriminatory purpose of the ECOA, which was “designed to empower women in the credit markets and to treat them as the legal/financial equals of their male spouses . . . .” 

Conclusion 

The Supreme Court will consider (1) whether spousal guarantors can be considered “applicants” under the ECOA and (2) whether the Fed had authority under the ECOA to clarify by regulation that guarantors are statutory “applicants.”  Hawkins and Patterson assert that the contextual meaning of “applicant” in the ECOA includes a guarantor, and that the Fed clarified this definition when it amended Regulation B in 1985. However, Raymore contends that a plain reading of the statutory language is proper and indicates that the word “applicant” does not include a guarantor. Hawkins and Patterson also argue that Congress gave the Fed power to interpret any ambiguous language in the ECOA. Raymore responds that Fed attempted to redefine “applicant” in a way that was inconsistent with its plain meaning, and thus exercised more power than Congress granted. The Supreme Court’s ruling will affect the ability of married small-business owners to obtain commercial loans and the costs and underwriting standards of such loans.  

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