QUESTION
We believe that a guarantor is not an applicant under the ECOA. However, we are getting conflicting views. Hopefully, this is a settled issue. So, is a guarantor also an applicant under the ECOA?
ANSWER
I applaud that you look to resolve conflicting views vis-à-vis matters involving regulatory compliance. So, thank you for asking this question. I will first give you a straight answer and follow with some discussion for you to consider.
The short answer is, a guarantor is not an applicant under the ECOA.
Now let’s get to the discussion.
I take you back to March 2016, when the U. S. Supreme Court, evenly split - because Justice Scalia had died - affirmed without opinion a lower court’s decision in Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Circuit 2014). Hawkins affirmed summary judgment for a bank that allegedly had required Hawkins and Patterson to guarantee commercial loans solely because they were married to their husbands, in violation of the Equal Credit Opportunity Act (ECOA). The decision turned on the definition of “applicant.”
Consider this: the ECOA makes it unlawful for
“any creditor to discriminate against any applicant[,] with respect to any aspect of a credit obligation…on the basis of…marital status.”
The ECOA defines “applicant” to mean:
“any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”
The 8th Circuit held that:
(1) the text of the ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another, because a guaranty is not an application for credit; and
(2) because the ECOA language is unambiguous, the court did not need to defer to the definition of “applicant” in Regulation B.
But here's the rub: since 1985, Regulation B, the ECOA's implementing regulation, has defined the term “applicant” to include guarantors.
At the time, Regulation B's definition of “applicant” continued to control outside the Eighth Circuit. NOTE: The Eighth Circuit includes Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.
In any event, the affirmance by the U.S. Supreme Court had no precedential value in any other circuit. So, let's move on.
Last year, the 11th Circuit joined two other circuits (the 7th and 8th Circuits) in holding that a guarantor is not an “applicant” under ECOA. [Regions Bank v. Legal Outsource PA, 936 F.3d 1184 (11th Cir. 2019)] NOTE: The 7th and 11th Circuits include Alabama, Florida, Georgia, Illinois, Indiana, Wisconsin.
I will spare you the extensive details of this litigation; however, the bottom line was that, according to the 11th Circuit, although a guarantor makes a promise related to an applicant’s request for credit, the guaranty itself is not a request for credit, and certainly not a request for credit for the guarantor. Put succinctly, to say that a guarantor requests credit by supporting another’s request for credit would push the bounds of ordinary usage “at the very least, it is to use one word in two obviously different senses. And to say that the guarantor applies for credit by supporting another’s application is to leave ordinary usage behind entirely.”
I think the court’s proffered illustration is worth considering, as follows:
Suppose a high-school senior is applying to her parents’ alma mater, and her parents – who happen to be wealthy donors – promise the school that they will make a large gift if their daughter is admitted. The parents’ promise supports the daughter’s application for admission, just as a guarantor’s promise supports a loan applicant’s application for credit. The parents will be grateful if their daughter is admitted, as a guarantor ordinarily is grateful when the debtor’s application for credit is granted. But it would be unnatural to say that the parents have “applied” for their daughter’s admission or to call them “applicants” for admission. Under any ordinary use of the word, the student is the only “applicant” in this scenario.
Thus, according to the court, an examination of the statutory text as a whole, with its use of the term “applicant” in other provisions, provides ample evidence that the term refers to a person who requests a benefit for himself. This lack of ambiguity rendered Regulation B’s interpretation of the term (as including guarantors) not entitled to judicial deference.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
