Lenders May Be Unable to Enforce Personal Guarantees that Violate the Equal Credit Opportunity Act

Commercial Lending Bulletin

A federal district court in Florida found that a spouse can raise a violation of the Equal Credit Opportunity Act (ECOA) as an affirmative defense to enforcement of a spousal guaranty. Though the ECOA does not address the enforceability of a guaranty obtained in violation of its terms, the court ruled that a spouse can use the ECOA’s requirements as an affirmative defense to the enforcement of a spousal guaranty despite the lender’s arguments that a spousal guaranty is not rendered void by the Act and that the nature of modern banking would be negatively affected by this remedy.

In 2005, PNC Bank’s predecessor agreed to extend a loan to a borrower provided that the borrower’s wife guarantee the loan. The wife agreed and executed a personal guaranty. The borrower defaulted on the loan and the lender sued not only the borrower to enforce the promissory notes evidencing the loan, but also the wife to enforce her personal guaranty. In response to the lender’s complaint, the wife claimed that the guaranty was void and not enforceable because the lender violated the ECOA when it required the wife to execute the guaranty although the borrower was qualified under the lender’s “standards of creditworthiness for any loans made to him…based upon his own credit.”

Creditor Shall Not Require Spouse’s Guaranty if Applicant Meets Creditworthiness Standards

The ECOA states that “[i]t shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction…on the basis of race, color, religion, national origin, sex or marital status, or age.” This law’s implementing regulations further provide that a “creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and the terms of the credit requested.” The regulation provides for a monetary remedy for a violation but is silent with regard to the enforceability of a guaranty obtained in violation of the ECOA except to permit courts to grant such equitable and declaratory relief as is necessary to enforce the requirements of the act.

The court acknowledged that there is a split of authority among the courts as to whether a spouse can assert the ECOA as an affirmative defense to enforcement of a guaranty procured in violation of its terms. The lender, citing Florida court precedent, argued, among other things, that 

  1. “there is no basis in the language of the ECOA for finding that a violation renders a guaranty void; 
  2. allowing such a remedy is contrary to the remedy provided by the ECOA; and 
  3. the ‘nature of modern banking’ counsels against creation of such a remedy as it would result in unintended consequences.” 

The wife, in turn, also citing Florida court precedent, argued that it is contrary to public policy to enforce an obligation that was obtained in violation of the law.

Obligation Obtained in Violation of Law Not Enforceable

The court agreed with the wife, finding that the lender’s policy arguments and the court cases the lender cited were neither persuasive nor binding. The court noted that while the lender was correct and the ECOA does not “include invalidation of the guaranty as a remedy,” under Florida law, “[A] contract which violates a provision of…a statute is void and illegal and, will not be enforced in [Florida] courts.” The court then noted that permitting the wife to raise a claim that the guaranty was unenforceable because it violated the ECOA was not contrary to the remedy provisions of the ECOA because such provisions provide that “a court ‘may grant such equitable and declaratory relief as is necessary to enforce the requirements’ of the act.” Finally, with regard to the lender’s policy arguments concerning the “nature of modern banking,” the court noted that several courts already had allowed the defense, and “the banking system has yet to collapse from the fallout” finding that “commercial institutes can evaluate this risk, as they routinely do with other uncertainties, and account for it in making their purchasing decisions.”

This case is cited as: PNC Bank, Nat’l Ass’n v. Miller, No: 6:13-cv-208, 2013 WL 2455972 (M.D. Fla. June 6, 2013).

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