Obviously, creditors would like to obtain as much security as possible prior to making a loan, but it is also important to keep in mind the Equal Credit Opportunity Act (ECOA). For anyone not familiar with the ECOA, it is a federal law that prohibits lenders from discriminating against borrowers based on their race, religion, national origin, sex, or marital status. So, in what instances may a creditor obtain a spousal guaranty without running afoul of the ECOA and what happens when a creditor violates the ECOA?
If an applicant’s spouse has no affiliation with the business, a creditor may require his or her signature only when (1) the credit is secured with property that is held in both spouses’ names or (2) where the creditor is relying on a piece of property to establish creditworthiness that is held in both parties’ names. This makes sense as otherwise a creditor would not have a valid lien or be able to pursue the property that was pledged to establish the credit in the first place.
In all other situations a creditor may request that a spouse sign the guaranty, but the creditor is not allowed to require the spouse’s signature as a condition of extending credit. Of course, a creditor may request that an unqualified applicant find an additional gurantor to establish creditworthiness, but the applicant is under no obligation to use the spouse as the guarantor. The issue is that an otherwise creditworthy applicant may not be denied because his or her spouse refuses to guarantee the obligation.
If a creditor violates the ECOA there are civil damages for any harm caused by the violation, and based on a recent decision by the North Carolina Court of Appeals, the portions of the contract that are in violation of the ECOA will be void and unenforceable. Therefore, requiring a spouse’s signature in an inappropriate situation would result in the spouse being let off the hook, and may open the creditor up to civil damages as well as penalties imposed by federal enforcement agencies.
In sum, there are only a limited number of instances where a spouse’s guaranty may be required, but if a party does not meet credit standards it is not a violation to request additional guarantors sign the document, and that additional guarantor may or may not be the applicant’s spouse without running afoul of the ECOA.
Thank you to Rob Armstrong for your contribution to this article.