On September 9, 1999, representatives of NACM met with two senior legal officers representing the Board of Governors of the Federal Reserve Board in order to clarify issues surrounding the Equal Credit Opportunity Act (ECOA) and guaranties of spouses dealing with the extension of business credit. Participating for NACM were Jack Clark, CCE, Chairman of NACM's Government Affairs Committee and Chairman Elect of NACM, Robin Schauseil, NACM Executive Vice President,Jim Wise, NACM Washington Representative, and Charles Tatelbaum, NACM Counsel. Representing the Federal Reserve Board at the meeting were Leonard Chanin, Managing Counsel, and Kathleen Ryan, Attorney for the Federal Reserve Board.
Prior to the meeting, NACM provided the staff of the Federal Reserve Board with substantial information concerning the problems and issues relating to the ECOA that faced business credit executives. The specific issue discussed at the meeting involves Section 202.7 of the ECOA.
Section 202.7 provides that, except in community property states, a business credit grantor may not seek the personal guaranty of a spouse of an officer or director of the customer if that spouse is not an officer or director themselves unless a credit investigation discloses the need for the spousal guaranty While the ECOA and its regulations are somewhat confusing on the issue, the issue is further compounded by the reference to community property states.
In addition to community property states, numerous states have adopted the common law principle of tenancy by the entireties. The tenancy by the entireties principle, dating back prior to the Magna Carta in England, provides that the creditor of one spouse may not reach assets of both spouses that are held as tenants by the entireties. Since the effect of community property, which is created by statute, and tenancy by the entireties are very much the same, creditor grantors who deal in states that have tenancy by the entireties are placed at a disadvantage since they run the risk of violating the ECOA if they seek a spousal guaranty without the appropriate credit inquiry which would be permissible in a community property state. Furthermore, since a credit grantor in a state that has tenancy by the entireties usually finds the guaranty of one spouse alone to be virtually worthless, it has created a perplexing problem and issue for many NACM members. This issue has been further heightened by decisions of state courts which liberalize the use of tenancy by the entireties, thus further frustrating collection efforts by credit grantors who rely on personal guaranties.
While the ECOA was originally created to eliminate discrimination in credit based upon race, religion, gender and national origin, the difficulty in securing spousal guaranties has had an opposite effect. Instead of promoting the extension of credit to new and small businesses, many of which are minority owned, credit grantors not wanting to run the risk of violating the ECOA have simply denied the extension of unsecured credit. This is a problem that confronts all areas of the NACM membership.
The NACM representatives were very pleased with the reception and understanding that was the response to their presentation and discussion. Intelligent and instructive questions and dialogue ensued, and the participants at the meeting gained a better understanding of each other's issues and problems. …