Alert November 12, 2013

Fourth Circuit Holds Borrower Waived Rights Under ECOA

The United States Court of Appeals for the Fourth Circuit affirmed dismissal of a claim under the Equal Credit Opportunity Act brought by plaintiff, a woman whose husband took out a commercial loan, alleging that the lender required her to sign as a guarantor on that loan, and on subsequent loan restructuring agreements made after a series of defaults. Each agreement contained a provision by which she waived all claims against the lender, expressly stating that the waiver was made after consultation with counsel—though plaintiff alleged that her attorneys had conflicts of interest based on their concurrent representation of her husband. The lawsuit claimed that the lender’s spousal cosigning requirement violated both ECOA and Maryland’s analogous state statute.

Recognizing that ECOA generally prohibits spousal signature requirements when the spouse would qualify on the strength of his own credit, the Fourth Circuit recognized several exceptions to this prohibition: (1) when a spouse would not independently qualify for the loan; (2) when the spouse “owns or co-owns the entity benefitting from the loan”; and (3) when the spouses co-own collateral pledged for a loan. The Fourth Circuit assumed, without deciding, that guarantors were considered the equivalent of “applicants” for credit under ECOA (though one concurring judge disagreed with this assumption). The Court then ruled that none of the ECOA exceptions applied: plaintiff’s husband was not individually evaluated for creditworthiness; plaintiff was not a “de facto” owner of the business for which the loan was sought; and ECOA only applied to a pledge of collateral when that pledge related to a loan that would benefit the pledged property.  Thus, if plaintiff had not waived her right to sue, she would have stated a claim.

However, the Fourth Circuit ruled that plaintiff did waive the claim in the loan restructuring agreements. Plaintiff argued that enforcing a broad waiver of “any and all claims” would undermine ECOA, but the Court disagreed, reasoning that while such a waiver would be impermissible in an initial extension of credit, ECOA did not prevent lenders from requiring waiver as a precondition for restructuring agreements. The Fourth Circuit recognized that not allowing waiver in this context may hurt defaulting borrowers, as many lenders would choose not to negotiate restructuring agreements if such waivers were not allowed. Finally, the Court held that plaintiff stated no facts to support her argument that the attorneys’ alleged conflict of interest “prompted her repeated decisions to waive her ECOA rights.”