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Fourth Circuit holds that lenders can require borrowers to waive ECOA claims in connection with loan work-outs

On November 5, 2013 by Schnader in Finance

By Stephen J. Shapiro

The Equal Credit Opportunity Act (ECOA) prohibits lenders, with certain exceptions, from requiring a borrower’s spouse to sign a loan.  In a recent decision, the Fourth Circuit held that, although a lender cannot require a borrower’s spouse to waive claims under ECOA as a precondition to extending credit, once the borrower defaults, a lender can demand that the borrower’s spouse agree to waive claims under ECOA as part of a negotiated restructuring of the loan.

In Ballard v. Bank of America, N.A., the plaintiff’s husband applied to Bank of America for a $4 million loan for use in operating his business.  Bank of America agreed to the loan on the condition that plaintiff sign the loan agreement as a guarantor, which she did.  When the company defaulted on the loan, Bank of America agreed to restructure it.  In connection with the restructuring, the bank required plaintiff to sign the restructured loan agreement as a guarantor.  The restructuring agreement, unlike the original loan agreement, also contained a clause pursuant to which plaintiff waived any and all claims she had against the bank.

After the company defaulted on the restructured loan and the bank placed a lien on property that collateralized the loan, plaintiff sued the bank, alleging that it violated ECOA by requiring her to guaranty her husband’s loan.  The district court dismissed plaintiff’s complaint, holding that it failed to state a claim, and that, in any event, plaintiff had waived any claims against the bank.

On appeal, the Fourth Circuit concluded that plaintiff had pled a viable claim under ECOA.  The Court first discussed the three circumstances in which a lender may require a borrower’s spouse to sign a loan agreement under ECOA: where (1) the borrower does not independently qualify for the loan; (2) the borrower’s spouse owns or co-owns the entity that will benefit from the loan; and (3) the borrower’s spouse co-owns property pledged as collateral for the loan.

The Court held that the first two exceptions to ECOA did not apply because plaintiff alleged that the bank did not evaluate whether her husband independently qualified for the loan and that she was not an owner of the company that benefitted from the loan – allegations that the Court was required to accept as true on a motion to dismiss.  The Court also held that the third exception did not apply.  Although plaintiff co-owned property that she and her husband pledged as collateral, that fact did not entitle the bank, as it did here, to require plaintiff to guaranty the entire loan.  Rather, ECOA’s “co-owned collateral” exception only entitled the bank to require plaintiff to sign documents that would have enabled it to obtain a lien over the pledged property.

After noting that “Bank of America well may have violated ECOA by requiring [plaintiff] to sign as an unlimited guarantor without first determining that her husband was not creditworthy,” the Fourth Circuit nevertheless affirmed the dismissal of plaintiff’s complaint because, it concluded, plaintiff had waived her right to bring any claims against the bank when she signing the agreement that restructured the defaulted loan.  The waiver clause might not have been enforceable, the Court suggested, had it appeared in the original loan agreement because requiring a borrower’s spouse “to waive her ECOA rights as a precondition for obtaining a loan” arguably would violate public policy by undermining the very purpose of the ECOA.  However, the Court reasoned that “[a]n ECOA waiver obtained in exchange for a loan restructuring differs significantly from one required as a precondition for a loan” because a waiver in a loan restructuring agreement “merely affords both parties a negotiated benefit: a means of escaping default for the borrower, and protections against future claims for the lender.”

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