Fourth Circuit Upholds ECOA Waiver in Loan Workout Agreements

November 18, 2013 at 9:39 pm Leave a comment

Writen by: Scott Smalley

The Fourth Circuit Court of Appeals affirmed a lower court ruling that a loan guarantor may, under certain circumstances, waive claims arising from a creditor’s violation of the Equal Credit Opportunity Act, as implemented by Regulation B, which prohibits creditors from discriminating against credit applicants on the basis of marital status.  While this is a favorable ruling for lenders, the opinion serves as a reminder that lenders should review their credit and underwriting policies to ensure and document compliance with ECOA and Reg. B prior to loan closing.

Bank of America required Kellie Ballard to guaranty a loan made to her husband’s business. When the loan went into default, the bank required Ms. Ballard to sign restructuring agreements in her capacity as a guarantor.  Those restructuring agreements contained broad waivers requiring Mr. and Mrs. Ballard to waive any and all claims against the Bank.  Additionally, the Ballard’s acknowledged that they “actively and with full understanding” participated in negotiating the agreement “after consultation and review with their counsel.”  Mrs. Ballard filed suit against the bank alleging violations under ECOA by requiring her to serve a guarantor. The district court dismissed Mrs. Ballard’s claims.  On appeal, the Fourth Circuit affirmed the ruling of the lower court.

The Fourth Circuit’s ruling hinges on the fact that the waiver was obtained in exchange for restructuring a defaulted loan and not as a condition to the original extension of credit.  The court reasoned as follows:

An ECOA waiver obtained in exchange for a loan restructuring differs significantly from one required as a precondition for a loan. The latter would permit a bank to circumvent ECOA’s clear dictates. The former merely affords both parties a negotiated benefit: a means of escaping default for the borrower, and protection against future claims for the lender. In fact, refusing to enforce waivers attendant to refinancing could well harm borrowers like the Ballards, since a lender would be reluctant to work with a borrower to restructure a loan after a default if the lender knew that a waiver would not be enforced.

This is a good decision for lenders (particularly those operating within the Fourth Circuit), but it doesn’t provide a shield for all potential ECOA claims from spousal guarantors.  Moreover, it is not clear that waivers contained in more routine loan modifications (short of modifications to waive borrower defaults) will receive the same treatment as the waivers discussed in the Ballard case.  Instead of relying on a waiver of claims contained in a post-default restructuring agreement, lenders should take steps necessary to ensure and document compliance with spousal guaranty rules from the outset.

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