One of the fundamental tenets of the Equal Credit Opportunity Act (ECOA) is that lenders are prohibited from discriminating against applicants in credit transactions “on the basis of race, color, religion, national origin, sex or marital status, or age.” 15 U.S.C. § 1691(a)(1)(2012). In a 2013 decision, RL Regi North Carolina, LLC v Lighthouse Cove LLC, 367 N.C. 425, 762 S.E.2d 188 (2013), the North Carolina Supreme Court analyzed this prohibition and provides additional guidance for businesses which extend credit.
Rules established for implementing the ECOA make it clear that it is impermissible for a creditor to enforce a policy in which a spouse is “required” to be a guarantor on a debt. For example, husband seeks an open account agreement from a building material supplier. Supplier will only extend credit if wife signs as a guarantor. This requirement is not based upon any review of creditworthiness, but instead is simply a standard practice for all sole proprietors or single owner LLC applicants. Such a policy is prohibited and therefore becomes a defense to any attempt to collect on the wife’s guaranty.
Continuing the hypothetical, if the creditor checks the husband’s credit and determines that the husband alone is not a reasonable credit risk, then the creditor can require a guarantor, but again cannot require that the guarantor be the spouse, and maybe more to the point must be able to demonstrate that the wife’s creditworthiness or their joint creditworthiness warranted the wife’s inclusion. If the husband were to select a business partner or relative instead of the wife, the creditor should not and, in terms of enforceability, could not require the wife be the guarantor instead.
So, what is different as a result of the RL Regi decision? In that case, there was a default on the original loan, so the debtors executed a forbearance agreement. Within the terms of the forbearance agreement was a waiver of defenses to the guaranty. This waiver was broad in scope exchanging new terms for payment for the waiver. The court determined that the forbearance agreement was not governed by the ECOA, was a contractual agreement, and therefore the principles of contract law apply. With that circumstance, then the wife, by signing the forbearance agreement waived any defenses she might have had in terms of the ECOA affirmative defense to the original loan document. Interestingly, in reaching this conclusion, the court relied on a case from 1874 thereby confirming one of the basic principles of contract law.
If you are a creditor, the take-away here is to carefully document those files where you are relying upon a spouse as a guarantor. If you are a debtor, you need to understand your rights and remedies initially, and you need to consult counsel before you execute any form of a settlement document.