Pub. 2 2012-2013 Issue 5

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S March • April 2013 21 port the extension of credit, or that the spouse’s guarantee was obtained in a manner compliant with the ECOA and Regulation B. It is important to remember that there are clear instances under Regulation B in which a guarantee from a spouse may be obtained in compliance with the regulation. Below are some of the instances provided for in Regulation B permitting spousal guarantees: • As explained in the official staff interpretations, a lender may require the personal guarantee of the partners, directors or officers of a business, and the shareholders of a closely held corporation, even if the business or corporation is creditworthy. This is permitted so long as the guarantee is obtained based on the guarantor’s relationship with the business or corporation, not on a prohibited basis. To the extent a lender obtains a guarantee on this basis, the loan file must properly document that the guarantee was obtained based on such a relationship. • In addition, a lender is permitted to request a guarantor under certain circumstances. If, under a lender’s standards of creditworthiness, the personal liability of an additional party is necessary to support the credit requested, the lender may request a cosigner, guarantor, endorser, or similar party. The applicant’s spouse may serve as this additional party, but the bank cannot require that the spouse be the additional party. • Regulation B also permits the lender to require the signature of the applicant’s spouse or other person on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of default, for example, an instrument to create a valid lien, pass clear title, waive inchoate rights, or assign earnings. However, the decision by the Missouri Court of Appeals in Frontenac provides a word of caution to lenders utilizing this exception under Regulations B. In particular, the court noted that an unlimited personal guaranty was more than a financial instrument necessary to make property being offered as security available to satisfy a debt upon default. In contrast, the court cited favorably a Tennessee case where a limited guaranty was obtained from a spouse. In the case, the wife’s guaranty was limited to the wife’s interest in the property owned with her husband, the debtor, as tenants by the entirety. The guaranty was secured with a mortgage deed on the property. Under such circumstances, the Tennessee court found that this method to obtain an interest in the real property offered as collateral was proper. A careful assessment of your bank’s loan policies with respect to spousal guarantees is necessary in ensuring com- pliance with ECOA and Regulation B. In addition, if your bank obtains a spousal guarantee from a spouse who is not involved with the borrower as a partner, director or officer of the business or a shareholder of a closely held corporation, you should ensure that your loan files include appropriate documentation to evidence compliance with the ECOA and Regulation B. It is important to note that a bank should take a similar approach where an uninvolved spouse enters into a loan transaction as a co-borrower. The risks to banks extend beyond problems in enforcing spousal guarantees. Violations of the ECOA and Regulation B subject a lender to significant penalties and liabilities, including: • Civil liability for actual and punitive damages in individual or class actions. The ECOA provides for awarding of costs and reasonable attorney’s fees to an aggrieved applicant in a successful action. • A banking regulator may refer a matter to the Attorney General of the United States. • Violations of the ECOA provide a basis for banking regulators to utilize other enforcement tools, including cease and desist orders, civil money penalties or requiring the lender to void the spouse’s guarantee. Frontenac was an important wake up call to banks to ensure they will be successful when enforcing a spousal guarantee. However, banks should also be on notice that their regulators will be closely scrutinizing any guarantee obtained from an uninvolved spouse as well. Q A careful assessment of your bank’s loan policies with respect to spousal guarantees is necessary in ensuring compliance with ECOA and Regulation B. Banks should also be on notice that their regulators will be closely scrutinizing any guarantee obtained from an uninvolved spouse as well.