The Pitfalls of the Federal Reserve Board’s Regulation B

The Equal Credit Opportunity Act (“Act”) governs fair lending practices and makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of sex or marital status.  Boyd v. U.S. Bank, N.A., 2007 U.S. Dist. LEXIS 72455 (D. Ct. Kan. 2007).

Authorized by the Act, the Federal Reserve Board has promulgated Regulation B, which is codified as 12 C.F.R. § 202.7(d)(1).  Regulation B provides in part that a creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on a credit instrument if the applicant qualifies under the creditor’s standards of credit worthiness for the amount and terms of the credit requested.  Id. at 16 citing 12 C.F.R. § 202.7(d)(1).

Regulation B is a tool litigants and potential litigants use against banks.  The original intent of Regulation B was to eliminate credit discrimination against women, particularly married women.  The objective was to ensure creditworthy, married women were able to obtain individual credit.  Unfortunately, Regulation B is more often used today as a sword and a shield against creditors.  Used as a defense to an enforcement action, or as a counterclaim, protected classes, including married women, are claiming that creditors wrongfully have required their signatures on guaranties or other credit instruments.

The line between when a creditor is authorized to require a female spouse’s guarantee and when the creditor is precluded is blurry.  The Official Comments to Regulation B provides “when an applicant requests individual credit, a creditor generally may not require the signature of another person unless the creditor has first determined that the applicant alone does not qualify for the credit requested.”  See Official Comments, 12 C.F.R. § 202.7(d).  The creditor may require a cosigner, guarantor, or endorser, but cannot require that it be the spouse.  Id.  Of course, if the female spouse is an applicant or co-applicant, there is not an issue with whether Regulation B has been violated.

Making the line even blurrier, a creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.  Id.  In Boyd, the United States District Court for the District of Kansas considered whether a joint financial statement that was submitted to the creditor constituted a joint application for credit.  The Court also considered whether the creditor’s requirement that the female spouse act as a guarantor was proper.  The creditor argued that it met the requirements of 12 C.F.R. § 202.7(d)(2) because the female spouse’s guarantee was “reasonably believed by the creditor to be necessary, under the law of the state in which the property is located.”  Boyd, 2007 U.S. Dist. LEXIS 72455 at 27.  The creditor focused on whether its requirement of the spouse’s guarantee was reasonable.  Id.

State property laws play an important role in a bank’s determination whether to require a spouse’s guarantee.  The property laws of a state vary as to whether a bank is allowed to go after property or assets that are owned jointly by a married couple.

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