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Why Lenders Should Care about the Supreme Court
Author: Barry Johnson and David O’Dens
Each year the United States Supreme Court hears only a handful of cases presented to them. It’s rare that the Court agrees to hear a case that affects commercial and consumer lenders. This year, however, two cases are before the court which can have a significant impact to the lending community. And the death of Justice Scalia will impact the decisions of the Court. The first of these cases – decided on March 23 – resulted in a 4-4 decision with no opinion, essentially leaving an important issue undecided.
In Hawkins v. Community Bank of Raymore, the Supreme Court was asked to decide who an “applicant” is under the Equal Credit Opportunity Act (ECOA). This case involves facts that lenders face every day. A Husband asked a bank to finance a real estate project. In the course of negotiating the terms of the loan, the Bank required Husband’s wife to guarantee the debt. This is a common loan condition. There was a default and following foreclosure the Bank sued Wife for the deficiency balance.
The Wife alleged that the Bank violated the ECOA by requiring her to guarantee her husband’s debt. The trial court disagreed, holding that the Wife was not an “applicant” for credit, as the ECOA only allows “applicants” for credit to sue. On appeal, the 8th Circuit Court of Appeals agreed with the Bank, and held that the Wife could not sue under ECOA.
The Supreme Court accepted the case late last year to resolve what is called a “circuit split”. A circuit split occurs when two courts of appeal disagree on the same question. Here the 8th Circuit held that a guarantor is not an “applicant”. However another court – the 6th circuit – has held that guarantors are applicants under ECOA and therefore have a right to sue lenders under the statute.
Oral argument was held before the death of Justice Scalia. On March 23, the Court summarily affirmed the 8th circuit in a 4-4 vote without opinion. The effect of this evenly divided vote is to affirm the 8th circuit’s opinion (meaning that the guarantor cannot sue) but not establishing any “precedent” for future cases. There still exists a circuit split of opinion meaning that the same case would be decided differently depending upon where the alleged violation occurs. While oral argument is not a perfect test of the position of a Justice, it seems clear that Justice Scalia would have provided the necessary 5th vote to affirm the 8th circuit’s opinion, and therefore resolve the issue in favor of the lender making that holding binding on all courts.
A second case, Speko v. Robins, was also argued before the death of Judge Scalia. This case – though it does not directly involve a lender – has a significant impact on consumer lending. At issue in Speko is the ability of a consumer to sue under a federal statute when the consumer has not suffered economic harm. This issue was presented to the Court a number of years ago in another case which the Court ultimately dismissed as being “improvidently granted”. The Real Estate Settlement Procedures Act, for example, allows a consumer to sue for violations of that act. The statute, however, is silent as to whether the consumer has to suffer actual harm or damages to sue. Speko presents an opportunity for the Court to decide whether economic harm is required to sue under RESPA, and other consumer statutes.
Oral arguments once again would lead one to believe that Justice Scalia would not imply a right of action (suing with no damages) unless that right is clearly expressed in the statute. Now, there is a prospect that for the second time in three terms, the issue will not be resolved by the Court if the Court divides upon ideological lines and resolves the case with a 4-4 vote.