• Fourth Circuit Court of Appeals Holds Written Waiver of ECOA Claims in a Loan Guarantee Is Valid
  • November 11, 2013 | Authors: David N. Anthony; Maryia Y. Jones; Scott Kelly; John C. Lynch
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office ; Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office
  • On October 30, 2013, the United States Court of Appeals for the Fourth Circuit held that a waiver of the Equal Credit Opportunity Act (ECOA) claims obtained by a bank in exchange for providing plaintiff guarantor and her husband with a loan restructuring was valid.

    In the case, plaintiff was the wife of a loan applicant who obtained a business loan from a bank. In extending the loan, the bank required that plaintiff sign an unlimited guarantee of full and complete payment of the loan. After the husband’s business defaulted on the loan, the bank agreed to several loan modifications to cure the defaults. As with the initial loan, the bank required plaintiff-wife to guarantee each new agreement. These agreements contained a comprehensive waiver of plaintiff’s right to pursue any and all claims against the bank.

    In 2012, plaintiff filed a lawsuit claiming the bank violated the ECOA by requiring her to serve as her husband’s guarantor without evaluating whether the husband’s creditworthiness was sufficient to qualify for the loan without her unlimited guarantee. ECOA regulations prohibit lenders from requiring a spouse’s signature on a loan agreement when the applicant individually qualifies for the requested credit. The bank argued there was no ECOA violation because plaintiff co-owned the property that served as collateral for the loan. In the alternative, the bank argued that the written waiver of all claims precluded plaintiff from bringing her ECOA claim.

    Before ruling on the waiver issue, the Court of Appeals rejected the bank’s argument that no ECOA violation took place. The ECOA regulations permit an unlimited guarantee if the spouse co-owns the entity benefitting from the loan but only a limited guarantee to create a valid lien on the co-owned collateral property. Here, plaintiff-wife did not have an ownership interest in the husband’s business but only co-owned some collateral. “Under the theory espoused by [the bank], any time a borrower’s spouse co-owns any property designated as collateral, no matter how minimal, the spouse could be required to assume unlimited liability on the borrower’s debt. Such a construction . . . would seem to contravene the plain language and purpose of ECOA.”

    However, because the written waiver was valid, plaintiff was precluded from pursuing her ECOA claim. The Court emphasized that the bank did not require plaintiff to waive her ECOA rights in exchange for obtaining the loan. If it did, plaintiff’s argument would likely have merit. “When enacting ECOA, it seems unlikely that Congress intended to permit lenders to predicate the extension of credit upon a borrower’s initial willingness to endure discriminatory treatment.” Instead, the bank obtained plaintiff’s waiver only in exchange for its agreement to modify the loan after her husband’s business defaulted. The Court held that such waiver was valid and that, “refusing to enforce waiver attendant to refinancing could well harm borrowers . . . since a lender would be reluctant to work with a borrower . . . if a lender knew that a waiver would not be enforced.” Therefore, the waiver barred plaintiff’s ECOA claim.

    Practical Impact

    The Court of Appeals’ decision provides guidance in three areas. First, written waivers of ECOA claims are not permitted as a condition for obtaining the loan, but such waivers are valid if they condition loan restructurings and modifications. Second, lenders may require a loan applicant’s spouse to sign an unlimited guarantee if the spouse co-owns the entity for which benefit the loan is being extended. Third, lenders may not require unlimited guarantees when a loan applicant’s spouse co-owns only some of the collateral property. However, a limited guarantee to permit a valid lien on the co-owned collateral property is permissible.