JOINT SPOUSAL GUARANTIES & THE EQUAL CREDIT OPPORTUNITY ACT (ECOA)

Every company that grants credit must conform to the Equal Credit Opportunity Act. The ECOA evolved from consumer credit, but now provisions of the Act also affect business credit grantors. Congress is now enacting changes, which may or may not force you to change your current credit granting policies and procedures.

The applicant seeking a credit line must be provided a reason for credit denial if applicant submits such a request in writing. Typical creditor responses could be a weak Balance Sheet and Operating Statement, insufficient history, slow pay, unfavorable credit report, unbalanced debt/equity ratios, or any other reason as long as a response is given.

Requesting that an applicant execute a guaranty as a pre-condition of granting credit is acceptable under the Equal Credit Opportunity Act. Spousal Joint Personal Guaranties would be a valid additional requirement of a credit grantor only if the applicant’s credit worthiness was “evaluated” prior to the joint guaranty request. A Spousal Guaranty cannot be a pre-condition for granting credit; however, a Spousal Guaranty can be a post-condition of an increased credit line or a requirement after the applicant’s credit worthiness has been evaluated. A creditor in a current credit extended relationship may demand Spousal Guaranties, which would be justified because of additional exposure.

Williams and Williams, Inc. has developed correctly worded Joint Personal Guaranties, which satisfy ECOA requirements. Regarding Personal Guaranties, we must add a note of caution; in most states, if one has a Personal Guaranty on one spouse and not the other, foreclosure or execution against jointly held assets would not be possible. Accordingly, it is the opinion of Williams and Williams, Inc. that, if a company decides to mandate that Personal Guaranties be obtained, then the best route to take would be Joint Spousal Guaranties. This across-the-board posture eliminates the necessity of researching which states prohibit foreclosure on jointly held assets. Rather than be burdened with becoming an expert in state community property laws, it is best to be on the side of caution and broaden the scope of guaranties to include spouses. Any guaranty is significantly more advantageous than no guaranty.