WASHINGTON–The Supreme Court this week will hear arguments in the case of Hawkins vs. Community Bank of Raymore, a financial services case that addresses whether spouses can be included as guarantors on loans under the Equal Credit Opportunity Act.
In the Hawkins case, Community Bank made several loans totaling over $2 million to PHC Development, a Missouri-based LLC with two members: Gary Hawkins and Chris Patterson. Hawkins, Patterson and their wives executed personal guaranties to secure the loans. PHC failed to make payments due under the loan agreements, and Community declared the loans to be in default and demanded payment both from Valerie Hawkins and Janice Patterson as guarantors.
The women then sued Community, seeking an order declaring that their guaranties were void and unenforceable. They alleged that Community had required them to execute the guaranties securing PHC's loans solely because they are married to their respective husbands, and argued that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA.
According to Angela Kleine, a partner in Morrison & Foerster’s Financial Services Litigation Group in San Francisco, this is the second fair lending case the Court has taken up recently, following Inclusive Communities, in which the Court surprised many by approving regulators’ broad interpretation of a fair lending statute to embrace the “disparate impact” doctrine, going beyond the plain language of the statute.
“The issue in Hawkins is whether the definition of a credit ‘applicant’ in ECOA includes guarantors,” Kleine said in a released statement. “The statute doesn’t mention guarantors, but the regulation interpreting the statute, Reg B, adds guarantors to the definition.”
Kleine noted that the ECOA applies broadly to almost all aspects of consumer credit, like mortgage and home equity loans, auto loans, and credit cards. As a result, any Court decision dealing with the ECOA will have a broad impact in both the financial services industry and on consumers.
“For lenders, a decision may impact compliance programs by changing how lenders and regulators perform fair lending analyses, and open them up to potentially broader litigation and enforcement risk,” Kleine said. “The interpretation of guarantors as loan applicants would have ripple effects to other statutes that protect loan applicants, where treatment of guarantors is often unclear.”