Summary:
Kellie Ballard co-signed a loan agreement for her husband, Michael Ballard, for a loan (and three subsequent restructuring) from Bank of America (“BoA”) for his business, FoodSwing, even though she has neither an ownership or operating interest in the business. The couple owns, among other assets, a home in Maryland (presumably as Tenants by the Entireties) and a winery in California. In November 2012, Ms. Ballard brought suit against BoA, seeking equitable and injunctive relief under federal and state Equal Credit Opportunity Acts (“ECOA”), alleging that BoA improperly required her to serve as a guarantor.
ECOA makes it unlawful for “any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of . . . marital status.” 15 U.S.C. § 1691(a)(1) (2006). This prohibits lenders from requiring a spouse to guarantee a loan, when the applicant individually qualifies for the requested credit. 12 C.F.R. § 202.7(d)(1) (2013). There are several exceptions to this prohibition:
1. If the lender has determined that applicant does not individually qualify fo the loan;
2. If the applicant’s spouse owns or co-owns the entity that will benefit from the loan;
3. If the spouses co-own property that serves as collateral for the loan, the lender can require the applicant’s spouse to co-sign “for the purpose of creating a valid lien, passing clear title, waiving inchoate rights to property, or assigning earnings.” 15 U.S.C. § 1691d(a) (2006).
Ms. Ballard alleged that BoA required her to guarantee the loan without first evaluating Mr. Ballard’s creditworthiness. She conceded that BoA could have required her to sign documents sufficient to grant a lien against co-owned property, but that it was prohibited by ECOA from requiring unlimited liability, specifically personal liability for the debt. BoA argued, however, that ECOA allows it to require an unlimited guarantee when the applicant’s spouse co-owns collateral. The Court of Appeals, however, sided with Ms. Ballard on this point, holding that the plain language of ECOA only allows a limited guarantee for the purpose of creating a valid lien, except when the spouse is a co-owner of the property that is “directly benefitting from the loan.”
This did not, however, resolve the question as the 4th Circuit found that Ms. Ballard, through her subsequent and repeated acceptances of the loan restructurings, expressly waived “any and all” claims she may have had against BoA. A prospective waiver may have been impermissible in the initial loan, but were acceptable in the subsequent loan restructurings.
Commentary:
This is can be a powerful tool for married debtors, particularly in states where property can be owned as Tenants by the Entireties. Then unsecured creditors, who by nature of being unsecured cannont assert the “creation of a valid lien” exception to ECOA, would be in a position of having to show that the applicant spouse had been independently evaluated for creditworthiness before the loan or credit card application was made. Absent such a showing, the non-applicant spouse could assert that his or her liability was inappropriate under ECOA, thereby reverting the claim to only one against the applicant spouse and potentially precluding that creditor from sharing in any non-exempt equity in property owned as Tenants by the Entireties.
For a similar bankruptcy case, see:
http://www.ncmb.uscourts.gov/sites/default/files/opinions/westbrook.pdf
For a copy of the opinion, please see:
Ballard v. Bank of America- Equal Credit Opportunity Act
Category
Blog comments