|Business Credit Law and Regulations|
Be Mindful of Equal Credit Opportunity Act Regulation
Your credit application includes a form personal guarantee, that includes a spouse's guarantee. Given the downturn in the economy, you insist that the president and her husband of the corporation you are selling on credit sign the joint personal guarantee. You authorize the first-time credit sale to the corporation, but fails to pay. You make demand on the president and the spouse to honor the guarantee. They refuse and you sue on the guarantee. The spouse raises as a defense to pay on the guarantee that your company has violated the Equal Credit Opportunity Act (ECOA). The spouse claims that the corporation was independently creditworthy, and was not involved with the business.
You are looking for ways to make the sale, but reduce the credit risk and personal guarantees may achieve this. But how can ECOA affect your taking a personal guarantee? A state appellate court recently considered the interplay of ECOA and personal guarantees and is instructive for the credit professional.
What Is ECOA?
ECOA was enacted by Congress in 1989, and the Federal Reserve Board issued Regulation B to implement ECOA in 1990. ECOA is a federal statute that prohibits credit grantors from discriminating in the granting of credit based on a prohibited basis, including race, color, religion, national origin, gender, marital status or age.
As ECOA is a federal statute, it applies to all states. ECOA is intended to promote the availability of credit without regard to characteristics that have nothing to do with creditworthiness. Creditors are required to notify applicants of action taken on their applications, and to retain records of credit applications.
ECOA's prohibitions against discrimination are aimed primarily at the evaluation of a credit application by a credit grantor. The general rule is that a credit grantor may consider any information it obtains in evaluating whether to extend credit so long as the information is not used to discriminate against an applicant on a prohibited basis.
Obtaining A Spouse's Personal Guarantee
ECOA also bars a vendor demanding a guarantee from a spouse unless a vendor first determines that the applicant, say a corporation, does not qualify for the credit on its own. ECOA also does not permit a vendor to require a spouse to co-sign a personal guarantee if that spouse is not directly involved with the applicant. Unless the vendor can show that the applicant, say a corporation, was independently creditworthy, or that the spouse was involved in the applicant's business, the vendor can not condition the sale on the spouse being a co-guarantor.
Alleged ECOA Violation Do Not Invalidate Guarantee
The facts supporting the Appellate Court's opinion is that the applicant requested credit. The spouse, who was not involved in the business, guaranteed the debt. The creditor sued the spouse on the guarantee when the debt was not paid. The spouse responded to the creditor's lawsuit by contending that the creditor had violated ECOA as the applicant was independently creditworthy. The spouse contended the guarantee should not be enforced because of the ECOA violation and that she was entitled to damages. The court disagreed and denied the spouse's claims of ECOA violations. The court referred the case to the state supreme court to resolve issues on application of ECOA and counterclaims.
A Reminder When Taking A Personal Guarantee With A Spouse
A personal guarantee provided by a company's officer, and spouse, of a corporation's debt is a method to increase the credit professional's security. However, be mindful of your credit application that includes a form spousal guarantee. ECOA may restrict your taking of this guarantee. A guarantor always looks for ways to escape liability from the guarantee. Don't have an ECOA violation result in your guarantee being ruled unenforceable.
1. Boone National S&L v. Crouch, 2001 WL 182415 (Mo. App. W.D.)
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Fall 01