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Under North Carolina law, real estate can be held by married couples in a form known as "tenancy by the entireties," which means that the property cannot be reached by creditors of only one spouse. Therefore, lenders often obtain guarantees from the spouses of borrowers (or the spouses of individuals who own borrowing entities) to ensure that real estate assets (that might be necessary to satisfy a debt if the borrower or guarantor does not pay as agreed) will be availalbe as a source of repayment. Without spousal guarantees, lenders would often be unable to rely upon many real estate assets when underwriting a loan. Accordingly, the ability to obtain a guaranty of a spouse sometimes means the difference between a lender being able to make a loan and being forced to decline a loan application.
The Equal Credit Opportunity Act ("ECOA") and its implementing regulation, Regulation B ("Reg B") were intended to prohibit gender-based discrimination in lending. Its original intent was to prevent married women who were qualified borrowers from being refused credit because they did not have their husbands' approval. (This was apparently a problem in the early 1970s!) Over time, the ECOA was amended and interpreted to generally prohibit, among other things, requiring a spousal guarantee absent a showing both that the borrowing spouse is not independently creditworthy enough for the loan and that the guaranteeing or supporting spouse was not selected only on the basis of his or her status as a spouse. Put simply, if an individual seeks a loan from a lender, the lender cannot automatically require that the borrower have his or her spouse co-sign or guarantee the loan. The ECOA provides for the assertion of a claim against the lender if the ECOA is violated.
In August of last year, a panel of the North Carolina Court of Appeals had opined that a violation of the ECOA not only gave a spouse the right to assert a claim against the lender, it also allowed the spouse to escape the guaranty entirely. (RL REGI North Carolina, LLC v. Lighthouse Cove, LLC, COA12–1279.)
The case at issue involved a lending arrangement where most of the assets were held by the owner of the borrowing entity, while the borrowing entity itself had comparatively few assets. The lender required not only the borrower's owner to provide a guarantee, but also the owner's spouse. The borrower defaulted. A forbearance agreement was entered into in which both the owner and the spouse acknowledged the validity of the debt and waived any and all claims against the lender. The borrower defaulted again later. The lender sought to recover against both the owner and the spouse pursuant to the guarantees. The spouse asserted the ECOA as a defense and both the trial court and the Court of Appeals agreed that the guarantee was unenforceable against the spouse.
The North Carolina Supreme Court then agreed to hear the appeal of the creditor. Because of the harmful precedent that would be established if the Court of Appeals' ruling was upheld, one of my colleagues and I filed an amicus curiae (friend of the court) brief on behalf of the North Carolina Bankers Association in support of the creditor, asking the Court to reverse the Court of Appeals' decision. We argued both the creditor's position (i.e., that the ECOA cannot be asserted as a defense and that, in any regard, the borrowers had waived any such claim or defense) and policy arguments supporting the creditor's position. In an unanimous opinion authored by Justice Newby, the Supreme Court reversed the Court of Appeals. The Court did not address the affirmative defense issue, instead finding that the spouse-guarantor waived any potential defense by signing an agreement containing a broad waiver clause. The Supreme Court thereby left for another day the issue of whether the ECOA can be asserted as a defense to a guarantee. You can read the full opinion here.
As a result of this decision, lenders are well-advised to seek broad waivers (such as those covering "any and all claims, defenses, or causes of action") in forbearance agreements and loan modification agreements.